UK CPI Preview: Will February inflation data move the needle for the Bank of England?
- The Office for National Statistics will publish the UK CPI data for February on Wednesday.
- United Kingdom’s headline and core annual inflation are likely to fall; monthly CPI is set to jump.
- The UK CPI report could significantly impact the BoE’s interest rate outlook and the Pound Sterling.
The United Kingdom’s (UK) Office for National Statistics (ONS) will publish the Consumer Price Index (CPI) data at 07:00 GMT on Wednesday, just a day before the Bank of England (BoE) monetary policy announcement.
Pound Sterling traders will eagerly look forward to the UK CPI inflation report for fresh cues on whether the BoE will signal its first interest rate cut or retain its “higher rate for longer” stance.
What to expect from the next UK inflation report?
The headline annual UK Consumer Price Index is seen rising 3.6% in February, slowing from a 4.0% increase registered in January. The reading would be at its lowest since September 2021 but still much above the BoE’s 2.0% target.
The Core CPI inflation is set to fall to 4.6% YoY in February after reporting a 5.1% growth in January. Meanwhile, the British monthly CPI is likely to rebound 0.7%, following January’s 0.6% drop.
Despite the UK economy tipping into a technical recession at the end of 2023, the BoE’s brighter economic outlook for this year has dissuaded it from leaning towards a dovish pivot.
At its February policy meeting, the BoE maintained the key rate at 5.25%. Governor Andrew Bailey remained non-committal on what will be the Bank’s next interest rate moves in the upcoming meetings. However, he said that “we need to keep policy sufficiently restrictive for sufficiently long, nothing more, nothing less,” depending on the incoming data.
The policy statement said that the “BoE sees upward risks to CPI from geopolitical factors including the Red Sea, while domestic price and wage risks now “more evenly balanced.”
While testifying before the UK Treasury Select Committee (TSC) last month, Bailey explained that “we are looking beyond the temporary period when we expect CPI to return to target this year,” adding that he is looking for more sustained progress on the reduction of more persistent elements of inflation.
Therefore, the details of the CPI report, including food prices and the sticky services inflation, will grab markets’ attention in the run-up to the BoE policy announcements.
Previewing the UK inflation data, analysts at TD Securities (TDS) noted that “inflation likely took a decent step down across the board in Feb, largely on the back of base effects. Restaurant prices are the main risk to this print due to uncertainty around the scope for a rebound after sales weighed on prices in Jan.”
“Services remain the key focus for the MPC, and here we look for the y/y rate to come down to 6.0% y/y (BoE: 6.1%),” the TDS analysts said.
When will the UK Consumer Price Index report be released and how could it affect GBP/USD?
The UK CPI data is due for release on Wednesday at 07:00 GMT. The Pound Sterling has been losing ground against the US Dollar in the lead-up to the United Kingdom’s inflation showdown. The US Dollar stays supported at one-week highs ahead of Wednesday’s US Federal Reserve (Fed) monetary policy decision.
A higher-than-expected headline and core inflation data could reverberate the BoE’s “higher rates for longer” view, providing a fresh lift to the Pound Sterling. In such a case, GBP/USD could stage an upswing toward the 1.2800 level. On the other hand, GBP/USD could resume its correction toward 1.2600 if the UK CPI data show a notable slowdown in inflationary pressures, as expectations of a second-quarter BoE rate cut could be back on the table.
Markets are pricing in the first BoE rate cut this year at the August 1 policy meeting.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The GBP/USD pair is on a corrective decline from seven-month highs of 1.2893. The 14-day Relative Strength Index (RSI) has fallen below the midline, suggesting that the downside risks remain intact for the Pound Sterling.”
Dhwani adds: “A decisive break below the horizontal 50-day Simple Moving Average (SMA) at 1.2687 is needed to challenge the upward-pointing 100-day SMA of 1.2626. Further south, the 200-day SMA at 1.2595 could be retested. Alternatively, acceptance above the 1.2800 level on a daily closing basis is critical for GBP/USD to initiate a meaningful uptrend toward the multi-month high of 1.2893,” Dhwani adds.
On balance, we retain a modestly constructive picture for GBP vs. the EUR for the year ahead. This is supported by our house expectation that the BoE could retain steady policy until September. This compares with our forecast of rate cuts from both the ECB and the Fed in June. We continue to forecast a move to EUR/GBP 0.8400 in the latter half of this year.
– Rabobank
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.