The odds of the Bank of England raising interest rates again next month have jumped.
The money markets indicate there is a 97% chance that the BoE lifts Bank Rate by a quarter of one percentage point to 4.5% in May – up from an 82% chance yesterday.
The markest also imply there’s a good chance that rates will hit 5% by the autumn.
The Bank will be concerned that UK inflation looks to be stickier than hoped.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“After a surprise increase in February, CPI inflation resumed its downward path in March, falling to 10.1% from 10.4%. The fall in the annual rate was more than accounted for by falling petrol prices. However, mitigating this was a further acceleration in food price inflation, which reached its highest level in over 45 years.
“March saw both core and services sector inflation remain unchanged at 6.2% and 6.6% respectively. Stickiness in these measures, the latter of which the MPC often cites as an indicator of domestically generated price pressures, will concern the committee in advance of its May meeting.
The fact that this follows the latest labour market data [yesterday], which showed healthy jobs growth and a surprise pickup in private sector wage rises, and a stronger-than-expected performance from the economy, will probably tip the balance towards another rate rise next month.
UK inflation fell by less than expected in March, sticking in double figures as households came under pressure from food and drink prices soaring at the fastest annual rate since 1977.
The Office for National Statistics (ONS) said annual inflation as measured by the consumer prices index fell to 10.1% last month, resuming a downward trajectory after an unexpected rise to 10.4% in February. Inflation had peaked at 11.1% in October. City economists had forecast a drop to 9.8%.
The odds of the Bank of England raising interest rates again next month jumped on the news, with markets pricing in a 97% chance that policymakers will lift the base rate to 4.5% on 11 May and indicating the measure could hit 5% by the autumn.
The smaller than expected inflation dip comes amid a decline in global oil prices over recent months, and as the immediate impact from Russia’s invasion of Ukraine in February falls out of the estimates for the annual increase in consumer prices.
However, those falls were offset by the price of food and nonalcoholic drinks accelerating by 19.1% in the year to March, fuelled by record growth in the price of bread and cereals, as well as a sharp rise for biscuits and cakes.
Grant Fitzner, the chief economist at the ONS, said:
“The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year. Clothing, furniture and household goods prices increased, but more slowly than a year ago.
“However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high.”
There was one piece of encouraging economic data amid the gloom this morning – UK goods and services producers slowed their price increases last month.
Output prices (what is charged ‘at the factory gate’) rose by 8.7% in the year to March, down from 11.9% in the year to February 2023.
Input prices (what firms pay for their own goods and services) rose by 7.6% in the year to March, down from 12.8% in the year to February, suggesting inflationary pressures in the economy eased.
The ONS says:
Inputs of crude oil and petroleum products provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively.
Economist Julian Jessop, economics fellow at the IEA, tweets:
Over in the eurozone, inflation fell to 6.9% over the year to March, down from 8.5% in February, official data just released shows.
Inflation was pulled down by falling energy prices, as in the UK.
Unprocessed food prices rose by 14.7% year-on-year across the eurozone, data provider Eurostat shows, below the 19% food inflation recorded in the UK last month.
Compared with February, annual inflation fell in twenty-five Member States and rose in two. The lowest annual rates were registered in Luxembourg (2.9%), Spain (3.1%) and the Netherlands (4.5%). The highest annual rates were recorded in Hungary (25.6%), Latvia (17.2%) and Czechia (16.5%).
But, eurozone core inflation remained sticky.
Inflation excluding unprocessed food and fuel accelerated to 7.5% from 7.4%; an even narrower inflation measure that also strips out alcohol and tobacco picked up to 5.7% from 5.6%.
UK residential rents rose at the fastest annual rate since records began in 2016 in the year to March, as the squeeze on tenants continued.
The Office for National Statistics reports that private rental prices paid by tenants in the UK rose by 4.9% in the 12 months to March 2023, up from 4.8% in the 12 months to February 2023.
Annual private rental prices increased by 4.6% in England, 4.4% in Wales and 5.1% in Scotland in the 12 months to March 2023.
Within England, the highest annual increase was recorded in the East Midlands, at 5.1%, while the South East saw the lowest (4.2%).
Rental prices also jumped in London – by 4.8% per year, the highest annual rate since December 2012.
Gurpreet Gill, macro strategist for Global Fixed Income at Goldman Sachs Asset Management, also believes a May interest rate increase is likely, saying:
“While the inflation data for March shows core services evolved in line with the Bank of England’s expectations, the upside surprise in core goods and foods was significant – with food prices rising close to 20% year-over-year.
“In recent months, UK economic indicators have been highly volatile. Efforts to bring about wage normalisation and disinflation have so far been a case of one step forward and two steps back.
“Continued inflationary strength in March, combined with a reacceleration in wage growth in February, will likely see the Bank retain its risk-management mindset and deliver another rate hike in May.”
The Bank of England has already raised interest rates eleven times in a row, which appears to be cooling the housing market.
House price inflation slowed to 5.5% per year in February, new data released by the Office for National Statistics shows, down from 6.5% in January.
That’s sharply lower than the recent house price inflation peak of 14.4% in July 2022, as increasing mortgage costs since September’s mini-budget pushed down demand.
The average price of a house sold dipped to £287,506 in February, the ONS reports, down from £290,381 in January. That’s £16,000 higher than 12 months ago, but £5,000 below the recent peak in November 2022.
The ONS’s data confirms the message from lenders such as Nationwide, who have also shown house prices falling this year.
The ONS adds:
The average UK house price has fallen for the third consecutive month, on both a seasonally adjusted basis and a non-seasonally adjusted basis.
Average house prices increased over the 12 months to £308,000 (6.0%) in England, £215,000 in Wales (6.4%), £180,000 in Scotland (1.0%) and £175,000 in Northern Ireland (10.2%).
Scotland’s annual house price inflation has generally been slowing since the recent peak of 13.8% in the 12 months to April 2022, slowing to 1.0% in the 12 months to February 2023.
The West Midlands saw the highest annual percentage change of all English regions in the 12 months to February 2023 (8.6%), while London saw the lowest (2.9%).
With inflation at double-digit levels, it will be harder for dovish members of the Bank’s monetary policy committee to argue against further rate rises, argues the BBC’s Andy Verity.
Last month, the MPC was split 7-2 when it decided to raise interest rates from 4% to 4.25%, with two members – Swati Dhingra and Silvana Tenreyro – voting to leave Bank Rate at 4%
Here’s a breakdown of how costs have soared in the UK, from sugar to bread, and electricity to pet products, driving up inflation:
With UK inflation not yet back on track, the general consensus at the moment is that the Bank of England will need to hike by 25 basis points, or a quarter of one percentage point, at its May meeting, predicts Giles Coghlan, chief market analyst, consulting for HYCM.
The strong wage growth seen on Tuesday makes another interest rate rise more likely, Coghlan says [wages rose by a faster-than expected 6.6%, which meant real wage still fell].
“The issue for the Pound and for the BoE is whether the latest data merits continued tightening.
The surge in average earnings will no doubt be sounding alarm bells that the dreaded wage-price spiral could become entrenched in the UK, which has moved the dial in favour of another 25bps hike when the monetary policy committee convenes next month.
Some investors are fearing that the dreaded wage-price spiral could be about to bite and it will be hard for the BoE to not hike rates next month”
Core inflation (stripping out food and energy) remains ‘stubbornly high’, says Debapratim De, senior economist at Deloitte:
“Inflation has come in above expectations. Food prices have risen at the fastest pace in over 45 years and even after excluding the effect of food and energy prices, residual inflation remains stubbornly high.
De adds that the Bank of England will want to see signs of broader easing of price pressures before contemplating interest rate cuts, cautioning that:
Interest rates seem likely to remain at their peak for longer than markets are expecting.”