UK May Inflation Falls Short of Expectations... "Reduced Need for Further BOE Rate Hikes"

May CPI Rises 2.8% Year-on-Year

The United Kingdom's Consumer Price Index (CPI) inflation rate for May recorded a 2.8% year-on-year increase, falling short of market expectations. With inflation rising more moderately than anticipated, some analysts suggest that the need for further interest rate hikes has diminished.

The Bank of England (BOE) building. Photo by Reuters Yonhap News

On June 17 (local time), the Office for National Statistics (ONS) announced that the UK's CPI for May increased by 2.8% compared to the same period last year. This figure matches the level seen in April and is lower than the market forecast of 3.0%. The ONS explained that stable food prices, including meat and dairy products, offset increases in airline fares, vehicle taxes, and gasoline prices.

According to Bloomberg, these inflation figures have been interpreted as reducing the necessity for the Bank of England (BOE), the UK's central bank, to raise interest rates. This is because lower-than-expected inflation has emerged amid a slowdown in the labor market and weakening economic growth.

Paul Dales, Chief Economist at Capital Economics (CE), stated, "This data could give the BOE confidence that there is no need to raise rates at the meeting on the 18th, and perhaps not in the future either." He also projected that next year’s inflation rate will fall to the BOE’s target of around 2%.

Previously, the market expected the BOE to keep the base interest rate unchanged at 3.75% at this meeting. In a recent survey, 65 economists predicted a rate hold. Looking beyond June, 40% anticipated at least one rate hike within the year, while six economists forecast a rate cut.

In particular, it is noted that the recent sharp decline in international oil prices, following a ceasefire agreement between the United States and Iran, is changing inflation expectations. The price of Brent crude fell below $80 per barrel, reaching its lowest level in about three months. Analysts say that if energy prices continue to fall, the upward pressure on gasoline prices and inflation in the UK could further ease in the future.

However, the BOE's caution has not been completely dispelled. The service price inflation rate, which reflects domestic inflationary pressures, stood at 3.7%, exceeding market expectations. The scheduled increase in household electricity and gas bills in July is also cited as a factor that could push up inflation in the short term.

Bloomberg Economics analyzed, "The sharp drop in oil prices following the US-Iran provisional agreement could significantly change the inflation outlook," adding, "If energy prices continue to decline, the BOE is more likely to maintain its current policy stance rather than raise rates."

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