Lower Inflation, Stronger Labor Market, What Happens to Growth? – Commerzbank

Thursday’s UK inflation figures were broadly slightly lower than expected due to a sharper decline in services inflation. However, those expecting the next rate cut in September should be cautious. Most of the surprise came from the volatile components. The seasonally adjusted change in the base rate was also only slightly below the average of the past 14 months and thus still much too high. The deal is not yet done, notes Michael Pfister, FX of Commerzbank.

The rise is unlikely to stop the BoE from cutting interest rates

“If inflation doesn’t (yet) pave the way for further rate cuts, growth might. The governor of the Bank of England (BoE), Andrew Bailey, emphasized several times at the press conference after the meeting two weeks ago that the first quarter growth figures overestimated the underlying trend. These comments have stayed with me ever since. After all, weaker growth would be bad news for the pound. However, Bailey did not provide any real concrete reason at the press conference.”

“The most concrete argument was that household consumption did not increase at all. The BoE is not wrong here and gives an indication of where the doubts about growth are coming from. After all, most of the surprisingly strong growth in the first quarter was due to net exports. In practice, imports fell more than exports, which is not necessarily a sign of strength in the UK economy. Therefore, the underlying growth trend is likely to be lower.”

“If today’s first estimate of second-quarter growth does not suggest that growth is on a somewhat broader footing, meaning that investment and consumer spending are not growing more strongly, it would be a clear warning sign that sterling’s strength is a little probably last forever. Ultimately, growth fueled by falling imports is unlikely to prevent the BoE from cutting interest rates. So that’s something to watch out for today.”