The Bank of England may feel a little more confident in cutting interest rates in August after digesting this week’s economic news.
Although there were no major releases, two surveys showed encouraging signs that inflationary pressures were easing, welcome news after April’s inflation data came in hotter than expected.
Wednesday’s purchasing managers’ index (PMI) showed input prices in the services sector rising at the slowest pace since February 2021. This helped output price inflation ease to its lowest level since April 2021.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said this week’s survey suggests “April’s blowout services inflation was more a flash in the pan than a sign of inflation re-accelerating”.
Services inflation came in at 5.9 per cent in April, well ahead of the 5.5 per cent expected by the Bank of England. The measure is viewed as a more accurate gauge of underlying inflationary pressures than the headline rate of inflation and will be closely watched over the months to come.
The services sector is labour intensive, meaning wage growth will be a major indicator of the future direction of price increases. Wage growth has remained fairly stubborn so far this year but a Bank of England survey showed signs that this too will moderate over the second half of 2024.
CFOs surveyed in May by the Bank of England expect wages to grow 4.1 per cent in the year ahead, the lowest level since the question was first put to them back in May 2022.
Commenting on this week’s data, Deutsche Bank’s Sanjay Raja said “forward looking price dynamics remain encouraging – despite the hard data pointing to sticky price pressures”.
Policymakers will get further figures to analyse when next week’s labour market figures are released on Tuesday morning.
The Bank of England will also have been paying close attention to the European Central Bank (ECB), which cut interest rates for the first time in five years on Thursday.
The ECB’s decision came even after they revised up their estimates for inflation over the next couple of years. The decision was widely seen as a ‘hawkish cut’, with a second rate reduction not expected until the autumn.
Speaking after the decision, Christine Lagarde, president of the ECB, said there was a “strong likelihood” that the ECB was moving to a “dialling-back phase”, but refused to commit to a specific timetable.
Analysts at Barclays noted that “the official communication was cautious and non-committal on the future path.” The Bank of England could well take a similar course, cutting in August without giving a clear timetable as to its next move.