The UK’s inflation rate will likely fall by the most in over 30 years on Wednesday when the April figures are released. This will give households some relief from the highest cost of living in decades.
According to an economist survey, the Consumer Prices Index will drop to 8.2% from 10.1% last month. This is because the sharp rise in energy prices from a year earlier was not included in the comparison.
The forecast for the month of March is brighter than previous months. However, the actual numbers reported in the last two months have been surprising on the positive side. Bank of England , investors and the are all eagerly awaiting this set of numbers. It will be a test of whether policymakers can raise interest rates as high as 5%.
This release will be the most important proof yet that Governor Andrew Bailey can follow the US Federal Reserve and open the door to a temporary pause in the 1 1/2 years long rate increase series.
Mike Riddell is a macro-portfolio manager at Allianz Global Investors. He said that the next UK inflation figure could be enormous. If we see a rise in core inflation then the market can easily price in an BOE base rate that peaks above 5%.
Investors bet on central banks continuing to hike rates through the summer if inflation continues to rise.
Riddell warns that if inflation slows more than forecast, investors who have sold UK bonds in anticipation of higher rates may rush to buy them back. This could result in “a big move lower for gilt yields.” Riddell warns that, if inflation slows down more than expected, investors may rush to purchase UK bonds, leading to “a large move lower in gilt rates.” Markets still expect the BOE key lending rate will reach 5% in September, up from its current 4.5%. The tone of central bank policymakers’ comments will be determined by whether the April reading confirms concerns about higher prices. The BOE will be evaluating two sets of CPI data before making its next decision, which is scheduled for June 22.
Imogen Bachra is the head of UK Rates Strategy at NatWest Markets. The BOE should be able to relax their stance on the gas pedal if they are able to combine rapidly falling headline inflation with evidence of a cooling labor market.
It is expected that the BOE will be relieved of some pressure after the release confirms the end of seven consecutive double-digit months of inflation.
Bank officials predict that April’s inflation will be 8.4%. Last time, the rate fell more dramatically was in April 1992. This was a year after Norman Lamont’s budget of 1991, which included a VAT increase and numerous duties, had triggered inflation.
As the surge in energy costs last year is no longer included in the calculations, this will have a powerful impact on the sharp fall in inflation.
Even if the data on Wednesday shows a sharp slowdown in inflation, the BOE would still want to know how May’s inflation and wage data turn out.
The markets have not yet been convinced by the evidence that would prevent the BOE from raising rates further. Previous surprises are driving the hike bets up.
The analysis of the price of rate hikes on the days that inflation figures were released this year reveals a clear preference for adding to rate hike bets — up to 25 basis points on occasions when the numbers came in hotter.
According to swaps linked to policy meeting dates, money markets bet on an additional half-point rise to a 15 year high of 5% in September. They are then expected to stay on hold until May when the first rate reduction is anticipated.
However, looking further ahead, the Federal Reserve’s expectations are not met. The BOE expects to reduce interest rates to 4% in two years. However, forward swaps price the US key rate below 3%. This rate is higher than that of the UK.
Andrew Goodwin is the chief UK economist for Oxford Economics. The markets are almost suggesting they will default again.