Low inflation reading unlikely to deter the central bank from hiking on August 2

Though latest inflation readings add some uncertainty, we continue to believe that the Bank of England is going to rise rates during this week’s August 2 meeting.

We still expect a Bank move despite the June inflation reading being a tenth below the Bank’s forecast, as economic growth has strengthened in the second quarter and the labour market remains solid.

Looking into the details of June’s inflation readings, we note that CPIH inflation turned out to be on the lower side because of weaker airfare and clothing price changes. These are volatile components and unlikely to last. For instance, we note that input price inflation has gathered new momentum, driven likely by higher energy prices.

Also, in the context of a strong labour market, unit wage costs are running at levels close to 3%. As to the economy, the growth recovery in the second quarter continued, though June’s retail sales were disappointing, with sales excluding cars falling during the month. However, strong sales momentum in April and May helped to push the quarterly growth rate to a 15-year high.

Gero Jung – Chief Economist – Mirabaud AM