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U.K. Inflation Cools in June, But Hawkish Stance Maintained By Bank of England


Harvest Global Markets :

The United Kingdom witnessed a notable slowdown in inflation in June, coming in below economists’ consensus expectations at 7.9% annually. While this decline provides some relief, the annualized price rises still remain significantly above the Bank of England’s 2% target, keeping inflationary pressures a pressing concern for the economy. Despite the cooling inflation, the Bank of England maintains a hawkish stance, signaling possible future actions to curb rising prices. Let’s delve into the factors contributing to the inflation moderation and how the central bank’s approach could impact the nation’s financial landscape. According to data released by the Office for National Statistics (ONS), the headline Consumer Price Index (CPI) increased by only 0.1% on a monthly basis, falling below the consensus forecast of 0.4%. Additionally, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, stood at 6.9% annually, a notable decrease from the 31-year high of 7.1% recorded in May. The decline in inflation was primarily driven by falling prices for motor fuel, but food prices still rose, although at a slower rate compared to the same period last year.

The release of U.K. inflation data caused the British Pound to slide 0.8% against the U.S. Dollar, settling just above $1.29 as of 11:20 a.m. Pakistan time. This depreciation reflects market reactions to inflation developments and indicates financial uncertainty. BOE Governor Andrew Bailey and the Finance Minister Jeremy Hunt have warned that high wage settlements are obstructing efforts to control inflation. The OECD projected the U.K. to experience the highest inflation rate among advanced economies, with a headline annual rate of 6.9%. To address persistent high inflation, the Bank of England implemented a significant 50-basis-point interest rate hike, the 13th consecutive increase. The Monetary Policy Committee faces the challenge of managing demand and reining in inflation amidst ongoing economic uncertainties. While the U.K. experienced a welcome cooling of inflation in June, the nation’s inflation rate remains notably higher and stickier than in other Western economies. As a result, the Bank of England is expected to maintain a more hawkish approach compared to other major central banks. The recent rise in the policy rate to 5% is likely to continue towards the 6.5% to 7% range in the coming months. If inflation moderates, the peak rate may be pulled down to the 6-6.5% range. However, the rising rates could exert pressure on the housing market, given that Britons renew mortgages every 2-5 years, exacerbating the already challenging cost-of-living crisis in the country.

The U.K. experienced a notable easing of inflation in June, providing some respite from the surging prices seen in previous months. However, inflation remains persistently high, and the Bank of England is adopting a hawkish stance to tackle the issue. The central bank’s cautious approach signals possible future rate hikes to contain inflation, but challenges lie ahead in balancing economic stability with rising living costs. As uncertainties persist, financial markets will closely monitor the MPC’s decisions in the coming months, with potential implications for the British Pound and the broader economic landscape.


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