Bank could play it safe and hold interest rates in August

Gladys Abbott
July 19, 2018

An anticipated pickup in United Kingdom inflation failed to materialize last month, a development that sent the pound lower as investors pared bets for a Bank of England interest-rate increase next month.

The cost of fuel rose to its highest level in nearly four years last month and held up the rate of inflation in the United Kingdom, according to the Office for National Statistics.

Petrol prices hit their highest in four years in the month, halting the decline in inflation that has been occurring since the start of 2018.

'However, gas and electricity and petrol prices all rose, with consumers seeing the highest price at the pump for almost four years, with inflation remaining steady overall'.

The wholesale price index (WPI) based inflation rate was 4.43% in May this year.

The EY Item Club earlier this week said it expects a steady slide in CPI over the remainder of the year.

Markets had been pricing in an 80% chance the BoE would lift borrowing costs in August. Comments from BoE officials over the next week could be a "game-changer", Monks said, drawing parallels with May, when a spate of poor data thwarted a widely expected rate hike.

"Once the Bank has hiked rates in August, we think heightened Brexit uncertainty could make it very complicated for policymakers to raise rates again before May 2019".

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Fuel prices have been steadily increasing since April due to a combination of higher global oil prices, higher fuel taxes and a weakening rand.

It marks the highest level for both petrol and diesel since September 2014.

The pound has hit a 10-month low versus the dollar after the latest inflation figures were seen as damaging the case for a United Kingdom rate rise next month.

However, the summer sales weighed on inflation after clothing prices were cut, in particular on men's fashion. Month-on-month, output prices gained 0.1 percent from May, when it rose by 0.5 percent.

Food prices eased by 0.6 per cent, largely due to a drop in fruit prices and a category that includes syrup, sugar, jam, chocolate and confectionery, for which prices fell 1.1 per cent and 1.3 per cent respectively.

Tej Parikh, senior economist at the Institute of Directors, said: "The stickiness in prices will reduce pressure on the Bank of England to hike interest rates in August".

The Consumer Prices Index including owner-occupiers' housing costs (CPIH) - the ONS's preferred measure of inflation - was 2.3% in June, in line with May's reading.

Therefore, the core rate of inflation slowed last month, falling below 1 percent for the first time since last March to 1.9 percent.

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