Banca March: May’s inflation data has precipitated a sharp move in UK official rate expectations that put the UK’s terminal rate at 6% and assigns a 40% probability that the Bank of England would launch a 50bp “jumbo” hike at Thursday’s meeting, which would raise official rates to 5%. The concern stems from the rise in core inflation to 7.1% and the eleventh consecutive upward surprise in headline inflation to 8.7%.
There are two main reasons for this lag compared to the United States or the eurozone. On the one hand, headline inflation is not falling despite a better energy outlook, as the wholesale price formation mechanism delays falls in energy prices, and on the other hand, core inflation, mostly composed of services, continues to be pressured by labour costs that are growing more than in the other two regions, in a labour market under pressure from the shortage of workers, mainly skilled, resulting from Brexit and from trade unions that have greater bargaining power.
The monetary authorities are therefore cornered and the meeting was expected to serve as a reference point to analyse which path the Bank of England will take, being the first of the major central banks to once again face the inflation or growth dilemma, as the IMF estimates that the UK’s GDP will shrink by -0.3% in 2023.
