UK CPI signals strong case for BoE rate cut – MUFG

If there was any doubt about a rate cut at the BoE’s MPC meeting tomorrow then those doubts are surely gone now after this morning’s CPI data for November revealed a much weaker than expected set of data. The main CPI readings were all weaker than expected with the annual rate falling 0.4ppt to 3.2%, which was 0.3ppt weaker than the consensus, MUFG’s FX analyst Derek Halpenny reports.

Market eyes potential 7-2 BoE vote in favor of сut

“Overall services inflation fell, but by just 0.1ppt to 4.4%. Housing services and actual rents slowed but this was offset by a pick-up in travel and transport. So overall the concerns over ‘sticky’ underlying inflation pressures will still persist within the MPC. Indeed, our own estimate of the BoE’s underlying services measure (excluding certain volatile components) actually picked up from 4.0% to 4.1%.”

“But overall this will be viewed as a good report and will reduce overall inflation concerns especially with the jobs data showing a continued deterioration in labor demand. Prior to the jobs and inflation data this week, a 5-4 vote favoring a cut with Governor Bailey joining the voters for a cut in November was a plausible outcome. Huw Pill could well now also vote for a cut, possibly along with Clare Lombardelli meaning up to a 7-2 vote favoring a cut is possible. Megan Greene and Catherine Mann could well continue to resist given the evidence of still ‘sticky’ underlying services inflation. “

“But ultimately, the BoE has more cutting still to do than most other G10 central banks. The inflation forecasts in February will be lower and another cut then seems likely. That is not priced at the moment and hence we see scope for front-end yields to move lower which will put the pound under increased downward pressure. EUR/GBP moving higher over the coming months is the likely outcome.”