Today’s market analysis on behalf of Michael Brown Senior Research Strategist at Pepperstone
18th December 2024
The November UK inflation report pointed to price pressures having remained persistent last month, killing stone dead the slim chance of any BoE policy shifts when the final Bank Rate decision of the year is announced tomorrow.
Headline CPI rose 2.6% YoY last month, the fastest annual rate since March, and considerably above the Bank’s own forecast of 2.4%, while core prices rose by 3.5%, 0.2pp quicker than in October, though marginally below market expectations. Causing further concern, services prices remain stubbornly high, having risen by 5% YoY last month for the second month running, also above the BoE’s expectations, as underlying inflationary pressures within the UK economy remain intense.
The chances of a 25bp cut at the December MPC were already incredibly slim, after the hotter than expected October earnings figures yesterday, with today’s inflation data cementing the case for the BoE to hold Bank Rate steady tomorrow. That decision, though, is unlikely to be a unanimous one, with uber-dovish external policymaker Dhingra near-certain to vote for another immediate rate reduction.
Looking further out, this morning’s data reinforces the case for the BoE to move gradually in removing policy restriction in 2025. My base case remains that the next 25bp cut will be delivered in February, with further such cuts following on a quarterly basis.
While risks to this base case are tilted towards a more dovish outcome, given increasing signs of overall economic momentum stalling, policymakers will be rapidly seeking convincing signs of disinflationary progress being made, as the economic cocktail facing UK Plc. increasingly becomes a stagflationary one.
Money market expectations, however, appear to have become overly-hawkish, with the GBP OIS curve, as at yesterday’s close, not fully pricing another cut until the May meeting – fading spot GBP strength, and selling pressure in Gilts, would hence be my preferred plays.