UK inflation held steady at BoE’s 2 per cent target in June

Stay informed with free updates

Simply sign up to the UK inflation myFT Digest — delivered directly to your inbox.

UK inflation held steady at 2 per cent in June, slightly above expectations, prompting traders to slash bets that the Bank of England will cut interest rates from their current 16-year high next month.

Wednesday’s annual consumer price data from the Office for National Statistics was above analysts’ forecasts of 1.9 per cent, remaining at the BoE’s target level, which it hit in May for the first time in three years.

After the release, investors reduced their bets that the BoE would deliver its first quarter-point rate cut next month to about a third, having previously been evenly split.

The MPC has signalled it is getting closer to lowering rates from their current 5.25 per cent. However such a move would hinge on policymakers being confident that underlying price pressures are fully under control.

A key concern has been stubborn services price growth, which is seen as an important gauge of underlying inflation. The latest figures showed services inflation holding steady at 5.7 per cent in June, ahead of analysts’ expectations for a decline to 5.6 per cent.

“It’s the stability of services inflation at 5.7 per cent that’s the blow,” said Paul Dales at Capital Economics. “As a result, the chances of an interest rate cut in August have diminished a bit more.”

Wednesday’s data marked the final inflation release before the Monetary Policy Committee’s August 1 meeting, at which it will announce its latest rate decision.

The higher-than-expected inflation figure come hours before UK Prime Minister Sir Keir Starmer is set to deliver the King’s Speech, in which he will lay out plans to “take the brakes off Britain” in a bid to spur economic growth.

“It is welcome that inflation is at target, but we know that for families across Britain, prices remain high,” said Darren Jones, chief secretary to the Treasury.

“That is why this government is taking the tough decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better off,” he added.

Sterling edged higher following the release, with the pound up 0.2 per cent at $1.2988 as traders reacted to the stronger-than-expected services figure.

Restaurants and hotels were the biggest drivers of inflation in the year to June. Core inflation, which strips out energy and food, was 3.5 per cent, the same rate as in May and in line with analyst forecasts.

The BoE described its June decision to hold rates at 5.25 per cent as “finely balanced”, with two of the nine members of the Monetary Policy Committee advocating to reduce rates.

Some other members have since signalled they are on the cusp of backing a rate cut, though the latest economic data may complicate their decision.

Huw Pill, the BoE’s chief economist, said this week that the central bank had made “substantial progress” in its efforts to bring price pressures down, but added that recent indicators have still pointed to “some upside risk”.

The MPC will also look at UK labour market data due to be released on Thursday for a further indication of the strength of the economy.

“The continued persistence of wage growth and CPI inflation means the MPC will have to proceed only gradually,” said Rob Wood at Pantheon Macroeconomics, “and the uncertainty about underlying inflation pressure means we expect rate-setters to wait until September for their first reduction.”