Experts interviewed by the media predict that statistical data will be released this week, indicating an acceleration in the growth of inflation in the United Kingdom.
Currently, an opinion is circulating among analysts, according to which new information on the dynamic of the increase in the cost of goods and services in the mentioned country will become a kind of cause for concern on the part of officials of the Bank of England. In this case, it is implied that the acceleration of the inflationary process will cause concerns of the financial regulator of the United Kingdom regarding the cutting of interest rates next month.
Experts interviewed by the media expect that on Wednesday, August 14, information will be released that inflation in the UK in July was 2.3%. It is worth noting that in May and June in the United Kingdom, the growth in the cost of goods and services was recorded at around 2%. Experts explain their forecast regarding the acceleration of inflation by the fact that recently such a factor as residents’ electricity bills has begun to weaken.
Moreover, analysts surveyed by the media expect that information about the weakening of the United Kingdom’s labor market will be published this week. If this forecast is confirmed by reality, the pressure on salary increases will decrease.
The data expected by experts will be a kind of reflection of the complex balancing process, the implementation of which is the task of Andrew Bailey, the governor of the Bank of England, and the rest of the BOE’s Monetary Policy Committee after a 5-4 vote for lowering the cost of borrowing this month.
It is worth noting that the official forecast of the financial regulator of the United Kingdom provides that inflation by the results of July will be fixed at 2.4%. The Bank of England also warns of increased inflationary pressures in the coming months. Moreover, there is currently an opinion circulating among experts that in the United Kingdom, in the foreseeable future, the unemployment rate will be on a growth trajectory. If this assumption becomes a fact of reality, the UK economic system will face new risks and challenges in the context of the prospects for implementing the dynamic of the recovery after last year’s recession.
On Monday, August 12, hawkish Bank of England rate setter Catherine Mann warned policymakers against lowering headline inflation to the 2% target. In this context, the continuing pressure on the United Kingdom’s labor market was mentioned. While talking to media representatives, the mentioned Bank of England rate setter stated that there are a lot of vacancies, just a lot of desire to employ people and there don’t seem to be workers out there, and of course, that is part of the wage setting process. Catherine Mann also noted that the leap towards higher wages and prices will take a long time. In this context, she underlined that pay settlements next year are one of the risks of higher inflation.
Data on the dynamic of inflation in the United Kingdom, which will be released this week, is likely to become a factor determining the vector of the monetary policy of the Bank of England. At the same time, markets are expecting a delay before the next rate cut. Inflation data will be closely monitored by the government of the new Prime Minister of the United Kingdom, Keir Starmer, who expects interest rates to be cut and economic growth to accelerate. If the corresponding expectations become reality, there will be additional opportunities for raising money for the treasury to further finance the improvement of public services.
Economist Dan Hanson says that the resumption of headline inflation growth in the second half of 2024 will form difficult conditions for the Bank of England. According to the expert, the increase in the mentioned indicator can easily be explained by the underlying effects that are associated with energy prices. At the same time, Dan Hanson noted that the prospect of easing the monetary policy of the financial regulator of the United Kingdom against the background of rising inflation is not favorable.
According to analysts interviewed by the media, data on the dynamic of the increase in the cost of goods and services, which will be released this week, will strengthen expectations that in September the Bank of England will not decide on cutting interest rates in September. Supporters of the corresponding forecast are convinced that the financial regulator of the United Kingdom will begin to consider the possibility of further monetary policy easing in November. At the same time, the November meeting of the Bank of England may have any result. This statement means that the continuing monetary policy easing in the mentioned month is not guaranteed or as likely as possible.
It is worth noting that in the current year, the pound sterling is the best-performing Group-of-10 currency. Recently, the national currency of the United Kingdom has been facing difficulties in growth. The corresponding state of affairs is largely due to the prospects of a slow cycle of lowering the cost of borrowing. Over the past four weeks, the pound sterling has been on a downward trajectory relative to the euro. This period of decline was the longest since December 2022.
If data on inflation and economic growth in the United Kingdom are released this week, which turn out to be softer than preliminary expectations for these indicators, the pound sterling is more likely to be in an area of increased vulnerability to another decline.
It is worth noting that investors expect the Bank of England to lower the cost of borrowing on a smaller scale compared to the Federal Reserve and the European Central Bank in the coming months. This point of view is based that the price pressure in the United Kingdom is stronger than in the United States and the eurozone. It is worth noting that the ECB has already cut interest rates once this year. At the same time, the Fed is taking an extremely cautious approach in the context of a potential monetary policy easing. Officials at the central bank of the United States are seeking to obtain as much data as possible indicating that inflation is on a steady trajectory of movement towards the 2% target before deciding to cut interest rates.
Currently, the markets are dominated by the expectation that the Bank of England will two times cut the cost of borrowing by the end of the current year. This forecast provides that each of the mentioned monetary policy easings will lower interest rates by a quarter point. It is also expected that the ECB will make three more decisions on lowering the cost of borrowing by the end of 2024. Moreover, according to investors, the Fed will cut interest rates twice this year.
For Keir Starmer’s government, economic growth and lowering borrowing costs are very important issues, including in a political context. Against the background of the last difficult years for the economic system of the United Kingdom, the improvement of the situation will be positively perceived by society. For the new government, the corresponding successes may become what can be described as additional political points.
Investors estimate the probability that the Bank of England will continue to ease monetary policy in September as minimal. In this context, they note that the path to cutting interest rates will become more difficult if increased turbulence is recorded in global markets. Moreover, there is a possibility that London will face some kind of unexpectedly soft indicators of the condition and the dynamic of the economic system of the United Kingdom.
Elizabeth Martins, UK economist at HSBC, says that there is currently no reason for the Bank of England to urgently further lower the cost of borrowing. At the same time, the financial regulator of the United Kingdom will monitor inflation data for July. It is worth noting that the Bank of England is currently afraid of inflationary pressures in the service area. Elizabeth Martins notes that the financial regulator of the United Kingdom is in no hurry to decide on further easing of monetary policy.
Bank of England officials are convinced that inflation will be on an upward trajectory by the end of 2024. In 2025, in their opinion, the growth rate of the cost of goods and services will weaken. At the same time, services in the catering sector may retain a price pressure factor.
Experts interviewed by the media predict that data on the state of affairs in the UK labor market, which will be published on Tuesday, August 13, will show an increase in the unemployment rate in July to 4.5%. It is worth noting that the mentioned indicator is the highest since August 2021. Analysts surveyed by the media also predict that overall wage growth will slow to 4.6% in the three months through June, compared with 5.7% which is the result for the previous period of the same duration. The expected data will record a weakening of inflationary factors, the source of which is the labor market. It is worth noting that in the United Kingdom, the shortage of labor after the coronavirus pandemic has increased concerns about rising wages and prices.
Also on Thursday, August 15, data on the dynamic gross domestic product (GDP) of the UK in the second quarter of 2024 will be published. Experts who were interviewed by the media predict that the relevant data will signal that the recovery of the mentioned country’s economic system after last year’s recession continues. In their opinion, the GDP of the United Kingdom for the second quarter of 2024 will show growth of 0.6%. It is worth noting that in January-May of the current year, the corresponding indicator increased by 0.7%.
On Friday, August 16, data on the dynamic retail sales in the United Kingdom in July will be published. Experts interviewed by the media predict that this indicator will grow by 0.6% monthly. It is worth noting that in June, retail sales in the United Kingdom showed a drop of 1.2%.
All the data that will be published in the current week will either strengthen or weaken the Bank of England’s concerns about the pace of economic growth. It is worth noting that at the August meeting, officials of this financial institution called economic growth an inflationary threat.
Anna Titareva, European economist at UBS, says that in the first half of 2024, the upward dynamic of the United Kingdom’s economic system turned out to be stronger than the preliminary expectations of the Bank of England.
This summer, the UK financial regulator decided to cut interest rates for the first time since the beginning of the coronavirus pandemic, which became a sanitary and epidemiological reality for the whole world in 2020. The pandemic has also proved to be a stressful factor for the global economy. Various kinds of restrictions have stopped or significantly limited the scope of workflows in many spheres of activity. These restrictions have also disrupted supply chains involving many countries.
In August, the Bank of England decided to cut its main interest rate to 5% from a 16-year high of 5.25%. It is worth noting that some experts did not predict this decision of the financial regulator of the United Kingdom. Proponents of the corresponding point of view were confident that the Bank of England would refrain from easing monetary policy and would adhere to an approach similar to the Fed’s strategy of not rushing to lower the cost of borrowing. This opinion was based on the fact that the UK services sector, which accounts for 80% of the country’s economic system, remains under price pressure.
The increase in interest rates has become a kind of global tendency after the coronavirus pandemic. Financial regulators have begun to make appropriate decisions amid rising prices associated with the above-mentioned disruptions in supply chains. In many countries, including the United Kingdom, progress has since been recorded in countering inflation. At the same time, it is worth noting that the continuation of a positive dynamic is not guaranteed. Currently, there is what can be described as total uncertainty in the space of the global economy. The corresponding state of affairs is complicated by such a factor of the reality of the present historical moment as the growing tension in the plane of geopolitical relations. For example, there is currently a consistent deterioration in the interaction between Washington and Beijing. The United States has restricted exports to China of advanced chips and equipment needed to manufacture these products. Also, geopolitical stability is clearly not facilitated by the increase in tension in the Middle East, where there is a risk of a large-scale military conflict, which, if materialized, will have a significant impact on the global oil and gas market. It is worth noting that in the era of globalization, the global state of affairs is a source of transformation of the situation in individual countries. This thesis is especially relevant in the economic context.
