Inflation Hits Target, But Will The BoE Cut Rates?

UK inflation dropped to 2% in May, according to the Office for National Statistics, increasing pressure on the Bank of England to cut interest rates in the coming months.

The fall in the annual inflation rate to 2% was in line with market consensus and marks the first time in since July 2021 that this has been in line with the official inflation target.

May’s fall in the inflation rate was driven by lower prices for food, drink, furniture, recreation and household goods, the ONS said.

The Bank of England will announce its interest rate decision tomorrow, but is expected to hold rates at 5.25%, the same level they have been since August 2023.

Market data, as measured by overnight index swaps, suggest a rate cut is more likely in August, when the Bank releases its quarterly monetary policy report and holds a press conference.

“Today’s inflation reading will help the case for rate cuts, with the UK now operating with one of the highest interest rates in the developed world, giving it much room for manoeuvre,” says Michael Field, European market strategist at Morningstar.

Core Inflation Remains Too High

On the side of an interest rate “hold” are services inflation and so-called “core” inflation (a longer-term measure that excludes transitory price changes in energy or food), which the Bank of England is still monitoring closely. Annual services inflation fell from 5.9% to 5.7% from April to May, but even this level is still too high for policymakers, who are forecasting a services inflation rate of 5.3% this year.

Field highlights that the rate of core inflation also remains high – at 3.5%. Services costs and home ownership costs, a key component of the core inflation measure, are likely to remain elevated, he says.

Policymakers are more concerned about core CPI because it’s falling more slowly than the headline rate of inflation. It’s also considered a more realistic measure of price pressures in the UK economy than the lower headline CPI rate.

When Will the Bank of England Cut Rates?

James Lynch, fixed income investment manager at Aegon Asset Management, praised the Bank for achieving a “gargantuan task” of bringing the Consumer Price Index from 11% in 2022 to 2% in May 2024. But policymakers will not be ready to cut rates until services inflation is tamed, he adds.

“The underlying mix of the inflation basket does not give it much comfort

UK inflation falls to Bank of England’s 2% target ahead of elections

U.K. inflation fell to the Bank of England’s target of 2.0% in May, the Office for National Statistics said Wednesday. The headline reading declined from 2.3% in April, bringing it in line with the central bank’s 2% target. The print is the last key economic measure ahead of national elections in July. Shoppers on the high street in the Kingston district of London, U.K. Bloomberg | Bloomberg | Getty Images

U.K. inflation fell to the Bank of England’s target of 2.0% in May, the Office for National Statistics said Wednesday, in the last print of the key economic measure ahead of national elections in July.

The headline reading declined from 2.3% in April and came in line with the 2% expectations of economists polled by Reuters.

Sterling rose slightly shortly after the release, trading at $1.2721 by 7:33 a.m. London time.

Services inflation — which is closely watched by the BOE given its dominance within the U.K. economy and its reflection of domestically-generated price rises — was at 5.7% in May, versus 5.9% during the previous month.

Core inflation, excluding energy, food, alcohol and tobacco, dipped to 3.5% from 3.9% in April.

Falling food prices were the largest contributor to the declines, while car fuel costs continued to see an upward pressure, the ONS said.

Unseasonably bad weather led to the slowest increase in grocery sales in two years, new figures from U.K. market research firm Kantar showed Tuesday. Grocery sales rose 1.0% in the four weeks to June 9, marking the sixteenth consecutive monthly decline in food inflation, according to the index.

Bank of England decision in focus

While the latest print brings inflation in line with the BOE’s target, Azad Zangana, senior European economist and strategist at Schroders, cautioned that upward pressure could return in the second half of the year, as the U.K. phases out its energy price cap.

“From the third, fourth quarter onwards, you might start to see a bit more upward pressure coming through as the Bank of England has warned,” he told CNBC’s “Squawk Box.”

Zangana suggested that the Bank could even “surprise” the market with a rate cut this week, when it next meets on Thursday. The Bank is otherwise widely expected to hold rates steady at 5.25%, where they have been since August 2023 — back

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The Fed is ‘playing with fire’ by not cutting rates, says creator of ‘Sahm Rule’ recession indicator

Economist Claudia Sahm has shown that when the unemployment rate’s three-month average is half a percentage point higher than its 12-month low, the economy is in recession. Sahm said the Fed is taking a big risk by not moving now with gradual cuts. Fed officials last week sharply lowered their individual forecasts for rate cuts this year, going from three expected reductions at the March meeting to one this time around. Economist Claudia Sahm on CNBC’s The Exchange.

The Federal Reserve is risking tipping the economy into contraction by not cutting interest rates now, according to the author of a time-tested rule for when recessions happen.

Economist Claudia Sahm has shown that when the unemployment rate’s three-month average is half a percentage point higher than its 12-month low, the economy is in recession.

As the jobless level has ticked up in recent months, the “Sahm Rule” has generated increasing talk on Wall Street that what has been a strong labor market is showing cracks and pointing to potential trouble ahead. That in turn has generated speculation over when the Fed finally will start reducing interest rates.

Sahm said the central bank is taking a big risk by not moving now with gradual cuts: By not taking action, the Fed risks the Sahm Rule kicking in and with it a recession that potentially could force policymakers to take more drastic action.

“My baseline is not recession,” Sahm said. “But it’s a real risk, and I do not understand why the Fed is pushing that risk. I’m not sure what they’re waiting for.”

“The worst possible outcome at this point is for the Fed to cause an unnecessary recession,” she added.

Flashing a warning sign

As a numeric reading, the Sahm Rule stood at 0.37 following the May employment report from the Bureau of Labor Statistics that showed the unemployment rate rising to 4% for the first time since January 2022. That’s the highest the Sahm reading has been on an ascending basis since the early days of the Covid pandemic.

The value essentially represents the percentage point difference from the three-month unemployment rate average compared to its 12-month low, which in this case is 3.5%. A reading of 0.5 would represent an official trigger for the rule; a couple more months of 4% or better

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May retail sales rise 0.1%, weaker than expected

Retail sales rose 0.1% in May, below the 0.2% the Dow Jones estimate. Excluding autos, sales declined 0.1%. Moderating gas prices helped hurt receipts at gas stations, which reported a 2.2% monthly decline. Following the retail data, traders in the fed funds futures market upped their bets that the Fed would cut interest rates this year. A worker assists with check-out at a Costco store in Teterboro, New Jersey, US, on Wednesday, Feb. 28, 2024.  Stephanie Keith | Bloomberg | Getty Images

Retail spending was weaker than expected in May as consumers continued to wrestle with stubbornly higher levels of inflation.

Sales rose just 0.1% on the month, one-tenth of a percentage point below the Dow Jones estimate, according to a Commerce Department report Tuesday that is adjusted for seasonality but not inflation. However, the result was slightly better than the downwardly revised 0.2% decline In April.

On a year-over-year basis, sales rose 2.3%.

The sales number was worse when excluding autos, with a decline of 0.1% against the estimate for a 0.2% increase.

Moderating gas prices helped hurt receipts at gas stations, which reported a 2.2% monthly decline. That was offset somewhat by a 2.8% increase at sports goods, music and book stores.

Online outlets reported a 0.8% increase, while bars and restaurants saw a 0.4% decline. Furniture and home furnishing stores also reported a 1.1% drop.

Stock market futures were around flat following the report while Treasury yields declined.

The report comes with investors on edge about the direction of the economy and what that will mean for the future of monetary policy at the Federal Reserve. Consumer spending is responsible for about two-thirds of all economic activity, so any weakness could signal both a retrenchment in growth while also pushing the Fed to begin cutting interest rates.

Inflation numbers of late have been somewhat encouraging, but spending is showing signs of weakening as consumers have been under pressure from rising prices for more than two years.

A Commerce Department measure that the Fed uses as its main gauge for inflation showed an annual rate of 2.7% in April, or 2.8% when excluding food and energy. The Fed targets 2% inflation.

Market pricing is pointing to the equivalent of two interest rate reductions this year of a quarter percentage point each, though Fed officials

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UK Inflation: What to Expect from May’s Data

UK inflation figures will be more closely watched than usual on Wednesday as the Office for National Statistics releases CPI data from May.

According to FactSet consensus figures, inflation is expected to have hit the official 2% target last month, from 2.3% in April. This would be the first time that the rate of inflation has been at this level since July 2021, and follows a three-year period that saw CPI hit 11.1% before falling back.

This data release is also significant because it’s the last inflation data before the general election on July 4. The Conservative party is campaigning on this issue, claiming credit for bringing inflation back to target.

If inflation does fall back to 2%, this will pile pressure on the Bank of England to cut rates from their current level of 5.25%. While this looks unlikely at the June 20 meeting, it can’t be ruled out completely.

Still, the fall in inflation back to 2% will be gratifying for the Bank, which hiked rates from 0.1% in December 2021 to 5.25% by August 2023, as it shows that drastic monetary tightening worked, eventually. In this period central banks slammed on the brakes to tackle a surge in inflation that hadn’t been seen for decades.

As we reach the half-way stage of 2024, inflation is proving persistent in the US and eurozone. The European Central Bank recently raised its inflation forecasts for this year, while the Federal Reserve has just adjusted its forecasts for core inflation higher for the end of this year.

Prices Aren’t Falling, They’re Just Rising Less Quickly

In the UK, April CPI came in at 2.3%, rather than the forecast 2.1%, which illustrates the uneven path back to target. Services inflation was still at 5.9% in April, and this is an area of concern for the Bank of England as it considers interest rate cuts.

In April, weaker energy prices drove the fall in inflation from 2.6% to 2.3%.

Rises in food and drink prices are easing from 2023 levels, but basic foodstuffs are significantly higher than before the global inflation surge.

Core CPI, which excludes more volatile energy and food prices, fell to 3.9% in April, from 4.2% in March. FactSet consensus has UK core CPI dropping to 3.5% in May. Policymakers are more concerned about core CPI because it’s falling more slowly than the headline rate of inflation and is also higher

What if the Bank of England Cuts Rates?

Financial markets widely expect an interest rate hold by the Bank of England on June 20 Monetary Policy, but what if they’re wrong?  A surprise cut is likely to have ripple effects across the stock, bond and currency markets.

Futures trading implies the chances of a rate cut next week are around 5%, with August the next likely date for a change in monetary policy. If there is indeed a rate cut this year, it is likeliest to occur on November 7, overnight index swaps currently suggest. 

And next week’s Bank meeting is the last before the upcoming UK general election, which has further aided the case for caution.  

As an institution, the Bank of England is independent of government policy, and has been since 1997. Though its aim is to reduce inflation to its 2% target, it must also be wary of appearing to assist an incumbent government staking its ongoing electoral chances on lower inflation – and cheaper money.

But the Bank of England, despite its recent caution, still has the capacity to surprise the markets, and there is disagreement between traders and economists about next week’s decision.

Markets Have Been Wrong on Rate Cuts Before 

Another reason to be wary of the doves is the BoE’s own history of wrong-footing investors. 

Back in December 2021, when it was making its initial efforts to contain an inflationary surge in the real economy, the MPC voted for a 0.15 percentage point increase in the base rate to 0.25%. 

Markets were not expecting this. At the MPC’s November 2021 meeting, committee members voted against an increase. With the benefit of hindsight, onlookers may now say the BoE was slow off the mark in attacking inflation.

Readers with longer memories may also recall the infamous “unreliable boyfriend” moniker given to former BoE governor Mark Carney – after Labour MP and former Treasury Select Committee member Pat McFadden accused the Canadian financier of giving mixed signals to savers and investors about the Bank’s intentions in 2014. Carney talked over many BoE meetings about the possibility of rate increases, but these never materialised. So-called “forward guidance”, where the Bank signalled its future intentions, was quietly scrapped.

Carney’s successor, Andrew Bailey, has been extremely careful to avoid such accusations. The current mantra for central bankers is “data dependency”, which means that policymakers are reactive to the monthly numbers on inflation, wages, jobs and economic conditions.

Bank of Japan set to reduce JGB purchases, stands pat on interest rate

The BOJ said in its statement it could reduce its purchases of Japanese government bonds after the next monetary policy meeting, scheduled to be held on July 30 and 31. During the intermeeting period, the BOJ said it will collect views from market participants and will decide on a detailed plan for the reduction of its purchase amount during the next one to two years or so. The Bank of Japan is largely expected to hold interest rates steady at the end of its 2-day meeting ending June 14, 2024. Seen here, the Japanese flag flying high at the BOJ headquarters in Tokyo. Kazuhiro Nogi | Afp | Getty Images

The Bank of Japan kept its benchmark interest rate unchanged on Friday, but indicated it’s considering the reduction of its purchase of Japanese government bonds.

The central bank left short-term rates unchanged at between 0% to 0.1% at the end of its two-day policy meeting, as widely expected.

But notably, the bank said in its statement it could reduce its purchases of Japanese government bonds after the next monetary policy meeting, scheduled for July 30 and 31.

The decision was passed with an 8-1 majority vote, with board member Nakamura Toyoaki dissenting.

Toyoaki was in favor of reducing JGB purchases, but is of the view that the BOJ should only decide to reduce them after reassessing developments in economic activity and prices in the July 2024 outlook report, slated for July 31.

Ahead of the next meeting, the BOJ said it will collect views from market participants and will decide on a detailed plan for the reduction of its purchase amount for the next one to two years.

Purchases of JGBs, commercial paper and corporate bonds will also continue as decided in the March monetary policy meeting.

Following the BOJ decision, the Japanese yen weakened 0.52% to 157.84 against the U.S. dollar, while the yield on 10-year JGB fell 44 basis points to 0.924.

The benchmark Nikkei 225 rose 0.68%, reversing earlier losses, while the Topix was 0.71% higher.

Bold policy moves

In March, the BOJ raised interest rates for the first time in 17 years — ending the world’s last negative rate regime — and scrapped the yield curve control policy in a radical policy move.

However, the central bank said at that

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Bank of England Rates Decision: What to Expect on June 20

Unlike May’s meeting, June 20’s decision will just be accompanied by a brief statement rather than the full monetary policy report and press briefing. So if there is no change to interest rates this week, there will be little guidance on when this is likely to happen.

Alongside the statement, one clue will come from the voting patterns: last month seven members of the monetary policy committee voted to hold, while two voted for a cut. It’s likely that more of the MPC join the cut cohort, but probably not enough to force a decision.

Money markets, as measured by overnight index swaps, suggest that August 1 is still the most likely date for the Bank of England to make its first rate cut since 2020.

August seems more likely from the point of view of the Bank’s calendar; the quarterly monetary policy report and press conference give policymakers more scope to explain decisions.

General Election is Hard to Ignore

The looming election is also a factor. While the Bank is proud of its political neutrality, common sense would lean towards waiting until after the election on July 4 to make a decision on interest rates. Opinion polls suggest a new government will be in power by the time the Bank next meets in August, and that will change the dynamic of economic forecasting, with new tax and spending plans in place.

In recent years, the Bank’s monetary policy and government fiscal policy have notionally worked in tandem. While shadow chancellor Rachel Reeves has ruled out an emergency budget on coming to power, the Labour party is likely to make significant changes to the economy this and next year.

But there is the chance of a surprise cut in June, says Morningstar’s European market strategist Michael Field, with inflation’s fall backing the case.

“Although the majority of economists are predicting the first rate cut in August, that majority is slim. In fact, a recent Reuters poll had more than 40% of economists suggesting this long-awaited rate cut would actually come in June.” 

Does the Data Back a Rate Cut?

In terms of UK economic data, not too much has changed to tip the balance towards a cut. On the side of “hold”, services sector wage growth, a concern of Bank officials, is still high. But May inflation is expected to have hit the 2% target, according to FactSet consensus, in

Wholesale prices unexpectedly fell 0.2% in May

The producer price index, a gauge of prices that producers get for their goods and services in the open market, declined 0.2% for the month against expectations for a 0.1% increase. PPI was held back by a 0.8% decrease in final demand goods prices, which was the largest decline since October 2023. In other economic news, initial claims for unemployment insurance jumped to 242,000 for the week ended June 8. That’s the highest level since August 2023.

A measure of wholesale prices unexpectedly decreased in May, adding another piece of evidence that inflation is pulling back.

The producer price index, a gauge of prices that producers get for their goods and services in the open market, declined 0.2% for the month, the Labor Department’s Bureau of Labor Statistics reported Thursday. That reversed a 0.5% increase in April and compared with the Dow Jones estimate for a 0.1% rise.

Excluding food, energy and trade services, the PPI was unchanged, compared with expectations for a 0.3% increase.

On an annual basis, the all-items PPI rose 2.2%.

Stock market futures saw some modest gains following the report while Treasury yields moved lower.

The release comes a day after the BLS reported that the consumer price index, a widely watched gauge of inflation that measures what consumers actually pay for goods and services, was unchanged on the month.

From the wholesale perspective, the PPI was held back by a 0.8% decrease in final demand goods prices, which was the largest decline since October 2023. Within the category, the energy index tumbled 4.8%. Food prices fell 0.1%.

On the services side, fuels and lubricants retailing margins surged 12.2%, but that was offset in part by a 4.3% plunge in airline passenger services prices.

The release comes a day after the Federal Reserve noted “modest further progress” in bringing inflation back down to its 2% target, but not enough for the central bank to start lowering interest rates. The Fed has held its benchmark borrowing rate in a targeted range of 5.25%-5.5% since July 2023 as it awaits more evidence that inflation is heading back to the central bank’s 2% target.

In other economic news Thursday, the Labor Department reported that initial claims for unemployment insurance jumped to 242,000 for the week ended June 8. That’s the highest

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Treasury Secretary Yellen says U.S. debt load is in ‘reasonable place’ if it remains at this level

Treasury Secretary Janet Yellen on Thursday said the swelling national debt is manageable as long as it stays around where it is relative to the rest of the economy.

In a CNBC interview, Yellen also noted that high interest rates are adding to the burden as the U.S. manages its massive $34.7 trillion debt load.

“If the debt is stabilized relative to the size of the economy, we’re in a reasonable place,” she told CNBC’s Andrew Ross Sorkin during a “Squawk Box” live interview. “The way I look at it is that we should be looking at the real interest cost of the debt. That’s really what the burden is.”

During the 2024 fiscal year, net interest costs on the debt have totaled $601 billion — more than the government has spent on health care or defense and more than four times what it has laid out for education.

Multiple Congressional Budget Office reports have warned about the soaring costs of debt and deficits, cautioning that over the next decade the public share of the national debt — currently about $27.6 trillion — will hit a new record as a share of the total economy over the next decade.

The public share of the national debt as a share of GDP is running at about 97% but is expected to soon top 100% at current spending rates.

Yellen touted President Joe Biden’s plans to manage the situation.

“In the budget the president presented for this coming fiscal year he proposes $3 trillion of deficit reduction over the next decade,” she said. “That’s sufficient to basically keep the debt to income ratio stable, and this interest burden would be stabilized.”

The budget deficit for 2024 is running at $1.2 trillion with four months left in the fiscal year. In 2023, the shortfall totaled $1.7 trillion.

The rising financing costs for the debt have come as the Federal Reserve pushed interest rates higher to bring down an inflation rate that had hit its highest level in more than 40 years in mid-2022. Inflation since has pulled back, but the Fed has held benchmark rates higher as it awaits more evidence that the rate of price increases is moving convincingly back to the central bank’s 2% target.

Following its policy meeting this week, the Fed said it has seen “modest” progress on inflation but is not ready to start reducing rates. Yellen, a

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