UK household inflation outlook eases ahead of rate decision

HOUSEHOLDS sharply revised down their expectations for UK inflation last month, in a sign that wage settlement pressures may begin to ease.

Individuals surveyed by the Bank of England (BOE) said they thought CPI inflation would be at 3.9 per cent in 12 months, down from 4.8 per cent when asked in November.

The data indicate that households are becoming more confident in the BOE’s ability to get the cost-of-living crisis under control.

This will come as a relief to policymakers on the rate-setting Monetary Policy Committee, who are worried that high inflation expectations are causing workers to demand increased wages, adding to the problem.

UK 2-year yields – which are among the most sensitive to changes in monetary policy – fell as much as 17 bps to 3.25 per cent, while money markets eased rate hike wagers by up to 14 basis points. That priced a 4.27 per cent terminal rate by June.

Official data to be released on Wednesday (Mar 22), however, could show inflation falling from its January rate of 10.1 per cent into single digits for the first time since last August. Households surveyed in February put the current inflation rate at 9.2 per cent.

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Goldman Sachs, meanwhile, has predicted that inflation could fall below the BOE’s 2 per cent target by the end of this year after the £2,500 (S$4,073.6) cap on energy bills was extended by Chancellor Jeremy Hunt in his budget this week.

The BOE is set to unveil its latest interest-rate decision on Thursday, with economists predicting a 25 basis-point hike to 4.25 per cent. The central bank has delivered an unprecedented series of increases since December 2021 in an effort to prevent a wage-price spiral. BLOOMBERG