Inflation stuck at 2.9% not enough for August BOE rate increase

[LONDON] Bank of England policy makers who favor keeping policy unchanged may get their way if inflation data comes in as expected.

The panel is split on whether to raise the benchmark interest rate, and data published Tuesday is likely to show that price growth remained at 2.9 per cent in June, according to a Bloomberg survey of economists. That may fall short of swaying more people to join the rate-hike camp. While inflation is accelerating above the BOE's two per cent target quicker than they expected, it could also fall back faster.

"The fact that import prices are being passed on from retailers to consumers faster than the BOE expected suggests that there's less of that inflation shock left still to come," said Samuel Tombs, an economist at Pantheon Macroeconomics.

"You wouldn't want to rule out completely an August rate hike at this stage, but I think the chances are pretty low."

The BOE announces its next policy decision and publishes new forecasts on Aug 3.

Officials voted 5-3 to keep rates on hold last month and have been drawing the battle lines in recent weeks over whether to stifle rising inflation after the economy held up better than many expected in the wake of Britain's vote to leave the European Union.

Growth slowed to 0.2 per cent in the first quarter of the year, though officials expect it to rebound somewhat.

Members of the BOE's rate-setting Monetary Policy Committee could be spurred to action if inflation reaches three per cent, according to Alan Clarke, an economist at Scotiabank.

That would force Governor Mark Carney to write a letter to Chancellor of the Exchequer Philip Hammond explaining why it's a full percentage point above target.

BOE Chief Economist Andy Haldane said that if the economy continues to hold up, beginning the process of withdrawing some of the stimulus provided in the wake of the Brexit vote would be "prudent".

He could join Ian McCafferty and Michael Saunders in voting for a rate hike, though he did stipulate that the development of wages would be crucial for his decision. With weakness in pay growth persisting despite unemployment at its lowest level in decades, he may be inclined to hold off on changing policy.

Mr Carney also said that "some removal of monetary stimulus is likely to become necessary", though he'll be watching whether weakness in consumer spending will be offset by rising investment. Ben Broadbent and Jon Cunliffe have indicated they're not ready to support a rate increase.

Silvana Tenreyro has given no indication of how she will cast her first BOE vote next month after replacing Kristin Forbes, who had been the leading advocate of a hike.

Retail sales data will be published Thursday, and while rising price-growth is continuing to squeeze household budgets, the figures could be helped by better weather in June.

They'll be important figures since they "could swing the balance" on second-quarter GDP, Scotiabank's Clarke said. He expects growth of 0.3 per cent when the report due out July 26, slightly less than the BOE's 0.4 per cent forecast and only a mild improvement from the previous three months.

BLOOMBERG