UK investors are tuning in this Wednesday to grab the latest on inflation data, which will paint a picture of where interest rates might head this year. According to the economists surveyed by Reuters, they’re predicting that the UK’s annual inflation is going to chill a bit to 3.1% in March, down from February’s 3.4%. That’s the lowest it’s been since the middle of 2021.
But let’s not throw a party yet, guys, because even with this drop, inflation’s still sitting higher than the Bank of England’s comfort zone at 2%.
Keeping an Eye on the Core
Not just the regular numbers, but the core inflation, which basically ignores the up and down drama of food and energy prices, is also expected to take a small step back to 4.3% from last month’s 4.5%. What this means is the Bank of England might not get too happy with slashing rates too much this year.
Just last week, those who bet on these things pushed their expectations of a rate cut from June to August. Why? Because the U.S. dropped a surprise with stronger-than-anticipated inflation for the third time in a row.
Tuesday’s also a big day with labour market stats hitting the stands. Everyone’s watching this because it’s got a lot to say about wage growth. Hot wages have been keeping the service sector inflation a bit too lively at 6.1% in February.
Good news might be on the horizon, though, as experts think earnings growth might cool off a touch to 5.5% in the three months to February, a slight dip from 5.6% in the previous period. This could give policymakers a bit of breathing room.
Is the UK Economy Doing a Slow Dance?
Let’s talk GDP.
The UK’s GDP nudged up by just 0.1% in February, says the Office for National Statistics. It’s a tiny bump, but it’s in line with what folks were expecting. This number comes after a bit of a slump in the last half of 2023, where the economy shrank, slipping the UK into a technical recession.
But there was a small win in January with a growth revision up to 0.3%. Not everything’s looking up though—construction output wasn’t doing too hot, dropping 1.9% in February. On the flip side, production output was the star of the show, climbing 1.1% in the same month, but growth in the big-shot services sector barely moved from 0.3% to 0.1%.
Some economists are not all that optimistic about a strong bounce back. They think it might not be enough to keep inflation and interest rates from tumbling down like what’s happening over in the U.S.
In fact, British inflation took a bigger dive than folks expected in March, hitting a near 2½-year low of 3.4%. But over in the U.S., prices climbed higher than expected at 3.5% this week, making some rethink when those interest rate cuts might start—pushing guesses from summer to September.
And this has got some wondering if what’s happening with the Federal Reserve will make other central banks, including the Bank of England, pump the brakes on any early rate cuts, especially if the U.S. dollar starts flexing.
Goldman Sachs even tweaked their forecast last Friday, dropping their prediction of Bank of England rate cuts from five down to four for the year, seeing them starting in June and then maybe easing into a quarterly rhythm.
Simon French, the chief economist at Panmure Gordon, chatted on CNBC’s “Squawk Box Europe,” pointing out that the Bank of England likes its independence but can’t ignore the upcoming UK national election hinted for later this year.
The heat’s on, especially with some talk from the governing party expecting rate cuts soon. He said this could push the Bank to get those rate cuts out of the way before voters hit the polls.
French wrapped it up by noting the numbers show the recession might be done, but it’s not exactly time to throw a party. The UK’s growth is still limping behind its pre-pandemic pace and lagging the U.S., but it’s keeping up with much of Europe and showing some spunk in areas like manufacturing and car production.
