UK CPI Reaction Ahead of BOE Decision

Inflation data in the United Kingdom were released ahead of the Bank of England's (BOE) anticipated monetary policy meeting tomorrow, where the policy rate is expected to remain unchanged.

Maintaining Vigilance

Consensus economic forecasts indicate the BOE will leave its policy rate steady at this meeting. Most analysts do not foresee a rate cut until the third quarter. This view follows a survey that CPI expectations will continue moderating through the end of the year. In its previous meeting, the BOE stated that the interest rate policy, currently at a 16-year high, was under review. However, easing was not coming as the central bank awaits additional economic data.

This same cautious approach is also anticipated at the upcoming meeting. The focus will likely be on the vote distribution among monetary policy committee (MPC) members. Last time, votes split three ways, with some favouring a hike, most supporting a hold, and one preferring a cut. While the sole dovish voter, Swati Dhingra, is historically more inclined to easing, questions remain about whether any hold voters might join her view at the next decision. Hawks advocating further tightening are expected to align with the majority, implying the vote could signal slightly more hawkish sentiment unless views shift towards broadly maintaining the status quo.​

Parsing Market Signals from the Data

The upcoming meeting will not include an updated outlook from the BOE on inflation and gross domestic product (GDP) forecasts. This could lead investors to closely examine Governor Andrew Bailey's post-decision press conference for additional insights. Earlier in the week, the market had shifted to price in a more gradual downward path for interest rates from the BOE, with just 63 basis points of cuts implied. As a result, UK government bonds have traded sideways as market participants await, similar to the BOE, greater clarity around when disinflation will fully take hold and the timing of the first rate cut.

UK inflation data released on Wednesday showed prices falling quicker than expected, reaching the lowest annual rate since September 2021. Markets forecasted inflation to be 3.5%, but the print came in lower at 3.4%, and core consumer prices also undershot projections. However, an initial dovish reaction is seen struggling after services inflation proved hotter than anticipated despite easing month-over-month (MOM). Several MPC members have voiced concern that persistently high services inflation could hamper moving towards easing, which may support holding the policy rate at current levels for now. In an informal poll, the shadow MPC was reported to vote 8-1 to keep rates unchanged.​

GBPUSD in a Rising Flag Pattern?

Cable has seen a correction from its recent peak of 1.2894, possibly forming a flag pattern. A break below the regional support of 1.2668 could push GBPUSD  lower to test 1.26, where initial support is expected. However, a sharper decline may lead the pair towards 1.2517. Alternatively, if bulls can push prices above 1.2750, it may allow a rebound to 1.2823 and even an attempt to reclaim the top.

Source: SpreadEx / SPOT, GBPUSD

Key takeaways

UK inflation fell faster than expected in the latest report. However, services inflation remained high, which could keep the BOE vote more solid around holding rates steady at tomorrow's policy meeting. Investors will be parsing comments from Governor Andrew Bailey for clues on the outlook for inflation and the timing of any potential future rate cuts.​