Thursday’s UK inflation figures came in slightly lower than expected, mainly due to a sharper-than-anticipated decline in services inflation. However, those anticipating a rate cut in September should exercise caution. Most of the surprise stemmed from volatile components, and the seasonally adjusted change in the core rate remains only marginally below the average of the past 14 months, which is still too high. Commerzbank’s FX expert, Michael Pfister, notes that it’s too early to sound the all-clear.
Growth Concerns May Influence the BoE’s Rate Decisions
“If inflation alone isn’t yet sufficient to justify further rate cuts, sluggish growth might be,” Pfister suggests. Bank of England (BoE) Governor Andrew Bailey recently emphasized that the first-quarter growth figures might have overstated the underlying trend. These comments have lingered in my mind, as weaker growth could spell trouble for the pound. However, Bailey didn’t provide concrete reasons during his press conference.
The most tangible point he raised was the lack of growth in household consumption, which aligns with the BoE’s perspective and hints at the source of doubts surrounding growth. Notably, the surprising strength in the first quarter was largely driven by net exports, as imports declined more sharply than exports—a development that doesn’t necessarily reflect robust economic health in the UK. Consequently, the underlying growth trend is likely weaker than it appears.
If today’s initial estimate of second-quarter growth doesn’t indicate a broader foundation—namely stronger investment and consumer spending—it could signal that the pound’s strength might not be sustainable. Ultimately, growth driven by falling imports is unlikely to deter the BoE from considering rate cuts, making this a crucial development to monitor closely.