UK Inflation Poised for a Historic Plunge to 1.5% Amidst Fiscal Stimulus and Economic Caution
In a keen analysis, ING Groep NV forecasts that rising pressures on food and energy expenses will drive UK inflation down to 1.5% in May. This projected figure stands notably below the target set by the Bank of England.
Comprehensive Projection for Inflation Reduction
According to ING’s market economist, James Smith, a “comprehensive” decrease in inflation is expected in the coming months. However, he cautions that the Bank of England might delay interest rate cuts until summer.
Potential Historic Milestone in UK Inflation
If realized, this projection indicates inflation hitting a three-year low, surpassing the BOE’s 2% target, marking a significant decrease. Such an outcome would be a significant milestone for Governor Andrew Bailey, who has faced criticism for his management during the price surge.
Forecast More Optimistic than Consensus
UK inflation at 3.9%, but Smith’s forecast, more optimistic, differs from economists’ consensus, anticipating positive developments. They suggest that inflation will gradually decrease to 2.1% by the second quarter of 2025.
WSJ Renewal contrasts with the 3.9% UK inflation, anticipating positive shifts, aligning with economic consensus.
Moderating Factors for Inflation According to ING
ING points out that the decrease in natural gas and food costs, coupled with reduced pressure on consumer goods, is beginning to moderate the pace of inflation. Updated data is expected to reveal a drop to 3.8% in December.
Warning on Interest Rate Cuts
However, despite the potential for inflation to fall below the BOE’s target by spring, Smith warns that this may not translate into interest rate cuts in the first half of 2024, contradicting market expectations.
Risks and Timeline for Interest Rate Cuts
There’s a risk of the market anticipating a May rate cut, especially with potential March tax announcements. Estimates suggest that the first reduction could occur in August. Risk of May rate cut rises with potential March tax announcements. Service sector inflation expected to remain stagnant between 6% and 7%.
Influence of Fiscal Stimulus on BOE Decision-Making
Smith also emphasized that a significant fiscal stimulus to the budget in March could tempt the BOE to wait before implementing interest rate cuts.