LONDON, July 19 (Reuters) – British inflation came in at its slowest pace in over a year in June, causing the pound to weaken against other currencies and giving the stock market a lift, although at 7.9% it was still well above the Bank of England’s 2% target.
Economists polled by Reuters had forecast that the CPI rate in the 12 months to June would drop to 8.2% from May’s 8.7%, moving further away from the 41-year high of 11.1% struck in October.
Sterling dropped broadly, falling against the dollar, the euro and the yen, as interest-rate futures showed investors no longer expect UK rates to peak above 6%.
On the FTSE 100, shares in homebuilders, landlords and real estate-related services were among the biggest gainers, as investors latched on to the idea that UK borrowing rates may not rise much more.
MARKET REACTION:
STOCKS: The FTSE 100 (.FTSE) rose 1.2%, lifted by a steep rally in property-related stocks, as a sector index of homebuilders shot up by nearly 7%, its biggest one-day rise since late 2008 (.FTNMX402020). A separate index of landlord shares rose almost 6%. (.FTUB3510)
FOREX: The pound fell by the most against the dollar this month, dropping by as much as 0.8% to $1.2934, but still within sight of last week’s 15-month high of $1.1344. Sterling was last down 0.6% on the day at $1.29575.
MONEY MARKETS: Overnight interest rate swaps suggested a terminal rate of between 5.75% and 6% by late 2023, or early 2024, while traders now believe there is a greater chance of the BoE raising interest rates by just a quarter percentage point this month than by half a point.
KEVIN BRIGHT, GLOBAL LEADER, CONSUMER PRICING PRACTICE, MCKINSEY & COMPANY, LONDON:
“Inflation dipped more than expected; but the gulf between the UK and the Eurozone inflation levels remains. Despite most categories seeing a decline, food & non-alcoholic beverage inflation at 17.3% remains only 1.8% below its peak in March 2023. But in a respite to consumers, while overall energy costs remain high, petrol and diesel prices have dropped over twenty percent in the last year (-22.3% and -24.3% respectively), contributing significantly to the overall decline we are seeing.
“Continued rising prices, higher interest rates and below inflation wage growth – are a triple blow to household budgets. This fiscal trifecta is driving consumers to change behaviours and take action to alleviate the pressure. Our new research shows nearly a third (32%) had to dip into savings to cover expenses and 21% used their credit card more often.”
JOE TUCKEY, HEAD OF FX ANALYSIS, ARGENTEX, LONDON:
“Significant sterling upside of late has been driven by the anticipation of yet further rate hikes from the Bank of England, and this morning’s release may challenge the need for such committed hawkish policy. Not only this, but the announcement creates some near-term downside risk as these recent long sterling positions partially unwind.
Markets now reduce the probability of a 50-basis point hike on August 3rd but will need to see a larger pattern of inflation data to really ‘call time’ on the UK’s ‘sticky’ inflation headache.”
JORDAN ROCHESTER, FX STRATEGIST, NOMURA, LONDON:
“Finally a weak number for CPI – UK services CPI peaked, down to 7.19% from 7.35% … not a massive collapse but it ends the worry for now that services were spiralling out of control (for a month at least).”
CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON:
“There will be sighs of relief all round at the Bank of England this morning, though one slower CPI print is not enough to cause a change in policy. But Andrew Bailey and his team will hope that it is the start of a trend.”
JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES, LONDON:
“Today’s fall in CPI inflation is a small step in the right direction for the UK economy, but high wage growth and stubborn underlying prices show there is still a long journey ahead to drag inflation back down into more stable territory.
“With the inflation rate checking in at 7.9%, the June data has not delivered any nasty surprises, but prices still remain too elevated for the Bank of England to sit back and relax.”
KENNETH BROUX, HEAD OF CORPORATE RESEARCH FX AND RATES, SOCIETE GENERALE, LONDON:
“Good news at last for UK inflation. Below forecast headline and core. Crucially, services eased to 7.2% from 7.4%. It’s still too high but a step in the right direction. It diminishes the likelihood of +50bp in August but certainly cannot be ruled out.
“Profit taking in sterling as a result should not be a surprise as we expect Gilt yields to come down versus U.S. Treasuries and Bunds. The pound was overbought after the run-up in recent weeks.”
JOSEPH CALNAN, CORPORATE FX DEALING MANAGER AT MONEYCORP, LONDON:
“It’s a relief to see today’s CPI data finally falling again – and quicker than forecast – but the UK economy is still in a troubling position. Both headline and core inflation are still well above comfortable levels, and that’s on top of the record 7.3% wage growth announced last week.
“Looking to currency, these overshoots and economic signals have been a core driver of FX markets over the past 6 months. The ONS releases from March to June have closely matched the pound’s meteoric rise from below $1.20 against the U.S. dollar to over $1.31. Once inflation eases off, if the drop is sharp enough, we will likely see the pound falling with it – so we need to be prepared for that, too.”
NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, LONDON:
“Some good news on UK inflation at last, coming in below expectations for June and most importantly the core inflation rate fell more than thought. Although we should expect it to track down further and it may be at its lowest level for a year, it is still high in absolute terms and the Bank of England needs to be vigilant and act accordingly until there can be a level of certainty that inflation is back under control.”
