Key Points:
- UK inflation fell to 2.3% in April 2024 from 3.2% in March, below 3% for the first time since July 2021.
- The probability of a June rate cut decreased from 50% to 15%, and August cut from 70% to 40%.
The April 2024 UK inflation report shows a major economic shift, dropping to 2.3%. This marks a notable decline from the 3.2% rate observed in March and represents the first instance of inflation dipping below 3% since July 2021. Despite this improvement, the figure is still slightly above the Bank of England’s (BOE) target of 2%. Moreover, it exceeds the Reuters poll expectation of 2.1%.
UK Services Inflation 5.9%, Core Inflation 3.9% in April
The report highlights mixed results in services inflation and core inflation. Services inflation remained stubbornly high at 5.9% in April, down marginally from 6% in March but still above the forecasted 5.5% by Reuters and the BOE.
Core inflation, excluding volatile items such as energy, food, alcohol, and tobacco, experienced a slight decrease. It stood at 3.9% in April, down from 4.2% in March. These figures indicate ongoing challenges in mitigating inflationary pressures in the service sector and essential goods.
June Rate Cut Probability Falls to 15% from 50%
The market has responded to the latest inflation figures by adjusting the probabilities of upcoming rate cuts. The likelihood of a rate cut in June has significantly decreased, with probabilities dropping from 50% to 15%.
Similarly, the probability of an August rate cut has been reduced from 70% to 40%. This shift reflects a more cautious market outlook in light of the persistent inflationary pressures, particularly within the services sector.
BOE Considers Summer Rate Cuts, ECB Likely in June
The BOE has indicated its willingness to consider cutting interest rates in the summer, contingent upon new data. The European Central Bank (ECB) is seen as the next major central bank likely to reduce rates, with a June cut anticipated unless a significant shock occurs. Meanwhile, the US Federal Reserve maintains a more hawkish stance, with expectations of a rate cut pushed back to after September at the earliest.
UK Economy Grows 0.6% in Q1 2024, PM Sunak Optimistic.
Prime Minister Rishi Sunak welcomed the decline in inflation. He asserted that it aligns with national targets. Furthermore, he expressed optimism about the economic outlook ahead of the national election in January 2025.
The UK economy exited a shallow recession in Q1 2024, showing recovery with a growth of 0.6%. BOE Governor Andrew Bailey emphasised the institution’s political independence in determining the timeline for the next rate cut, underscoring that decisions will be based on economic data rather than electoral considerations.
