Inflation is back at the top of the agenda tomorrow, in the last set-piece release of economic data before the Bank of England’s decision on interest rates on Thursday.
It is also one of the most significant. The consumer price index for February is expected to fall for the first time since November, coming down to 3.5% year-on-year from 4%. It stayed stuck last month after a shock rise in December.
Experts at HSBC expect a “broad-based” drop in prices, but one “likely to be particularly forceful in restaurants and clothing, helping deliver material declines in both core goods and services inflation.”
If the headline predictions in the City are right, it would take the rate at which prices are rising back toward the BOE’s official 2% target the day before the monetary policy committee votes on rates.
And with the services sector the dominant part of the UK economy, attention on that area will be particularly close.
The next move on the official base cost of borrowing in the UK is expected to be a cut, with interest rates at a 16-year peak of 5.25% since last August.
But the City’s expectations on the timing when the cuts will kick in action have moved further back, to June or August, meaning rates will have been up there for almost a year.
During that time, the interest rates offered on mortgages also rose, slowing the house market and putting choking off consumer spending. While that brought inflation down, as intended, from a peak over 11% in October 2022, it also helped pull the economy into recession.
Recently, rates on offer for home loans ticked back up as the change in expectations on the timing of a BOE cut showed up in the wholesale financial markets, where so called swap-rates feed into homeowners’ mortgage costs
That came in part as the BOE has also indicated that it expects to keep interest rates at relatively high levels for longer, to make sure that the fight against inflation is properly won after soaring energy costs after Vladimir Putin’s invasion of Ukraine sparked the cost-of-living crisis.
Rate-setters have been keeping wary watch on rising wages, as well as the rate of price growth in the services sector.
James Smith, developed markets economist at Dutch bank ING said: “Policymakers have signalled they need to see progress on this and private-sector wage growth before acting. This Thursday's meeting looks too early for any further hints on the timing of that first cut.”
And HSBC’s economists have also warned that influential parts of the inflation picture “have been choppy of late”. That means, said the bank, that “big surprises in either direction could affect the MPC’s thinking as it makes its policy decision”.
The numbers are due out at 7.00am tomorrow. The BOE rate decision is at noon on Thursday.
