Resurging UK inflation to keep BOE cautious on cutting rates

UK INFLATION probably hit its highest level in 10 months in January, continuing a resurgence in price pressures that has made the Bank of England (BOE) wary over rushing into interest-rate cuts.

Data on Wednesday (Feb 19) is expected to show consumer prices rising 2.8 per cent compared to a year earlier, driven by a jump in private school fees and a reversal of volatile factors that weakened inflation in December, according to the median projection of economists surveyed by Bloomberg.

The figures may support worries among BOE rate-setters that Britain’s inflation outlook is darkening at a time when the economy is also stagnating. It expects higher energy bills to lift consumer-price growth to a peak of 3.7 per cent later this year.

While two officials backed a bumper half-point rate cut when the UK central bank eased monetary policy earlier this month, the majority of the committee still sees a need for a guarded approach to lowering borrowing costs.

Most concerning will be an uptick in underlying measures being watched closely by the BOE for signs of domestic pressures. 

Services inflation is expected to rebound sharply from 4.4 per cent to 5.2 per cent, driven higher by erratic components such as air fares and an increase in private school fees after the Labour government made them subject to value added tax.

The labour market will also be in focus this week with data on Tuesday expected by forecasters to show wage growth excluding bonuses picked up to 5.9 per cent in the fourth quarter, up from 5.6 per cent previously.

While there are signs that Britain’s jobs market is loosening, pay pressures are seen as too strong to keep inflation near the BOE’s 2 per cent target.

Data suggests that the number of UK workers being put on notice for the axe is running well below levels seen a year ago. Scarred by the struggle to recruit in the tight post-Covid labour market, firms may be still reluctant to let go of workers and hoarding labour.

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Asia

In its first meeting of the year, the Reserve Bank of Australia is expected to finally join the global monetary easing campaign with a cut to its cash rate target to 4.1 per cent on Tuesday after core inflation slowed more abruptly than expected in the fourth quarter. 

Neighbouring New Zealand is seen continuing its easing cycle a day later with another 50 basis-point reduction in its benchmark that would take the rate to 3.75 per cent. Bloomberg Economics predicts the RBNZ will signal a lower terminal rate for this cycle. 

Elsewhere, Bank Indonesia is forecast to stand pat on Wednesday, while lenders in China, with a nod from the central bank, are expected to hold the 1-year and 5-year loan prime rates steady on Thursday. 

In data, Japan’s economic growth may have moderated a tad at the end of 2024 as private demand sagged, while consumer inflation statistics due on Friday will likely show prices rising at or above the central bank’s target for a 34th month, keeping rate hikes on the radar.