Higher-than-expected UK June inflation casts doubt on BoE rate cut expectations for August

British inflation held steady at 2.0% in June, missing forecasts for a slight decline to 1.9%. Persistent underlying price pressures dampened expectations for the Bank of England’s first rate cut since 2020 at next month’s policy meeting.

Service sector inflation remained at 5.7%, unchanged from May but higher than the predicted 5.6%. This increase was primarily driven by higher hotel prices during the tour of US pop star Taylor Swift. Despite this, UK inflation is now lower than in the United States and the Eurozone.

Economists highlight the service sector as a significant source of inflation, constraining the Bank of England’s ability to cut rates this year.

Following the data release, the likelihood of a BoE rate cut at the August 1 meeting dropped from around 50% to 35%, while sterling rose above the psychological 1.30 barrier, reaching a new high for 2024 against the US dollar.

Some analysts believe the recent rise in consumer prices might be short-lived, citing key factors behind the price increase. However, there are concerns about the persistent strength of services inflation, which fuels wage growth amid labor market shortages.

Markets are now looking forward to the release of the UK May labor report on Thursday for more insights into labor market conditions, a crucial factor in the central bank’s policy decisions