A June rate cut is getting more likely, though we think it’s still far from guaranteed. For now, our base case is August; it’ll come down to three things:
Firstly – and most importantly – services inflation. The single most important data point before June’s meeting is the April inflation release on 22 May. We've written a lot about April, seeing many service-sector prices subjected to annual contractual price hikes, often directly linked to previous rates of headline CPI. A back-of-the-envelope estimate suggests roughly 40% of the services basket is affected by this phenomenon, and both April 2022 and 2023 saw high month- on-month price rises, even after we adjust the data for seasonality.
Last April’s blowout services CPI figure drove the biggest daily change in UK two-year swap rates of 2023, and the risk is this year’s release is a market mover too. It’s true that lower headline inflation rates should mean more subdued April price hikes than last year and, therefore, lower year-on- year rates of services CPI. But we think services inflation will fall more slowly than the Bank of England is forecasting in the near term.
In short, we’re inclined to stick to our base case of an August rate cut, though it’s become a closer call since recent BoE comments. If the services inflation data is more benign than we expect, wage growth continues to trend lower and/or the Bank itself drops heavy hints at its May meeting, then a June rate cut could easily materialise – particularly if the likes of the Fed and ECB have done the same thing.- ING
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