Lower UK inflation weakens the case for rate hikes
In light of the latest UK inflation data, the desk argues that the case for Bank of England rate hikes has been weakened significantly. Per the full note from ING, lower food and service inflation indicates cooling price pressures that could allow the BoE to hold rates steady well into 2026. The inflation rate saw a decline to 2.6% in June, supported primarily by a drop in food prices which have fallen for two consecutive months, a pattern that was unexpected after earlier energy price spikes. This aligns with a broader trend of easing inflationary pressures across developed markets, making the central bank's tightening less likely in the near term.
What the desk is arguing
The desk sees the recent dip in UK inflation as a significant shift, weakening the likelihood of rate hikes by the Bank of England. Per the full note from ING, as food inflation continues to decline, it alleviates the concerns of BoE officials about entrenched inflation expectations stemming from rising living costs.
Headline inflation receded to 2.6%, unexpectedly below consensus forecasts. This marked decline can largely be attributed to a reduction in food prices, registering the second straight month of decreases, alongside an evidence of cooling in services inflation, which adds to the favorable outlook for monetary policy immunity in the UK.
Additionally, there's a notable phenomenon dubbed 'chipflation' affecting consumer electronics, with certain categories seeing spikes due to supply chain disruptions. Nevertheless, underlying trends suggest that the overall inflationary landscape is less severe than previously feared.
Where it sits in our coverage
Our consensus target for GBP/USD currently sits at 1.075 with a range from 1.04 to 1.12. Notable firm forecasts include: - jpmorgan: target of 1.10 for Mar26 - bofa: target of 1.04 for Mar26
This view diverges slightly from bofa, suggesting a more dovish tone in their expectations, while we generally align with jpmorgan's more optimistic outlook, leaning towards the higher end of the range.
How other firms see it
Firms such as jpmorgan and ing share a consensus on the easing inflation narrative, indicating that a steadier rate path is more likely. In contrast, bofa holds a more skeptical view, suggesting that tighter monetary policies might still be necessary.
As the GBP/USD trajectory reflects the BoE's rate path, the upcoming assessments of inflation could further clarify market positioning ahead of central bank decisions, particularly around current macroeconomic indicators like UK unemployment and wage growth.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lower food and services inflation points to diminished price pressures in the UK.
- 02June's inflation rate fell to 2.6%, below market expectations.
- 03The BoE is likely to hold rates steady into 2026 amidst easing inflation.
- 04Cooling services inflation supports the hawkish narrative for BoE.
- 05Watch for further developments in inflation data which may shift BoE's forward guidance.
Market implications
Traders should closely monitor GBP/USD around the 1.075 target, which could indicate market consensus on the BoE policy. With no immediate high-impact events on the calendar, watch for UK economic data releases that might signal shifts in inflation expectations.
Risks to this view
A reversal in this stance would occur should inflation readings unexpectedly spike or economic growth data suggest stronger consumer demand, potentially compelling the BoE to reconsider its rate-hike postponement.
Older quick take Quick take Published 07:48 United Kingdom Lower UK inflation weakens the case for rate hikes Lower food and services inflation is welcome news for the Bank of England hawks, who worry the UK is at risk of another persistent bout of price pressure. Though inflation is set to rise towards 3.5% later this year, we expect the Bank to keep rates on hold throughout 2026 Food inflation remains surprisingly subdued in the UK, with prices falling for the second month running Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK The latest UK inflation data for June is welcome news for the Bank of England hawks, who worry that the energy crisis risks morphing into a long-lasting bout of price pressure. Yes, at 2.6%, June’s core CPI data was a tad above consensus.
It looks like 'chipflation' has washed up on UK shores; portable device prices spiked by 22% month-on-month, the biggest monthly change since the series began in 2015. It’s possible that’s related to the Apple price hikes. But that aside, there are two reasons this data is good news for the hawks.
Firstly, food prices recorded their second consecutive month-on-month fall. That is highly unusual in recent history and echoes the equally benign food inflation story we’ve seen in many parts of Europe during Q2. Remember this wasn’t supposed to be happening in the aftermath of a spike in energy prices.
True, it will take a good year or so for the impact on food inflation to peak. But for those BoE officials who worry about the “salience” of food and petrol prices in forming consumer inflation expectations, the latest fall in both should be welcomed. It was enough to drag headline inflation down to 2.6%, below consensus. 'Chipflation' has arrived in the UK Source: Macrobond, ING "> Source: Macrobond, ING There’s also further evidence that services inflation is cooling off.
Our calculation of the BoE’s preferred gauge of “core services” inflation shows it falling from 3.8% to 3.6%, a sharper pullback than in the overall services index. The trend is encouraging and, coupled with low private-sector wage growth, suggests that domestically generated inflation is currently very benign. In short, these figures provide no compelling reason to hike interest rates right now.
We expect the Bank of England to hold rates throughout 2026 before looking to cut rates gradually from next spring. UK services inflation is cooling Source: Macrobond, ING "> Source: Macrobond, ING We’ve long argued that the Bank is more likely to hike rates if inflation is projected to reach 4%. We’re still some way below getting there, even with the latest rise in oil and particularly natural gas prices.
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