بالبلدي: Bank of England set to hold interest rates despite inflation hitting 2% target

The U.K. had some cause for celebration on Wednesday morning، as headline inflation hit the Bank of England’s 2% target for the first time in nearly three years.

But the print only served to further convince traders that an interest rate cut is not imminent.

Money market pricing by 11 a.m. in London implied just a 5% probability of a reduction of the Bank Rate during Thursday’s BOE meeting — after recording stronger odds earlier in the week. Bets on an August cut were also trimmed to roughly 30%.

A significant milestone

While The 2% inflation reading is a significant milestone — not least as British politicians set out their stalls ahead of a general election in just over two weeks — it has been anticipated for some time and was largely driven by the sharp year-on-year decline in energy prices. Fluctuations in the rate over the coming months are expected as the drag from energy fades.

Policymakers are equally focused on services inflation، key to understanding domestic price pressures in the country’s services-oriented economy، which came in at 5.7% — higher than the 5.5% forecast by economists in a Reuters poll.

Core inflation، excluding the volatile components energy، food، alcohol and tobacco، remained well above the central bank’s long-term average at 3.5%.

“We’ve seen some good stuff in terms of seasonality، food prices are coming down as well،” James Sproule، chief economist at Handelsbanken، told CNBC’s “Street Signs Europe” on Wednesday.

“But looking over the rest of the year، even the Bank of England itself is expecting inflation to start to creep up a bit again over the course of the autumn،” he said.

“I think the most disturbing thing lots of economists like myself are looking at right now is what’s happening in services inflation. That’s largely about people’s salaries and earnings. And those numbers have been proving a good deal stickier than we would like،” Sproule said، with the BOE targeting services inflation of around 3%.

Whether the BOE cuts rates in August or September remains a close call، he added.

Average U.K. wage growth excluding bonuses held uncomfortably high for the BOE at 6% in June، though there were signs of a loosening labor market.

At its last meeting in May، the central bank said that recent inflation readings had been “encouraging،” but that the chance of a rate cut would be assessed at each meeting and based on the latest data.