UK inflation holds at 2.8% as Bank of England rate decision nears
Britain's inflation rate remains steady in May, keeping consumer price growth above the Bank of England's 2% target ahead of its latest policy decision. The reading is lower than economists expected and comes as energy market tensions linked to the U.S.-Iran conflict continue to shape the outlook for prices.
Highlights
- UK inflation held at 2.8% in May, defying economist forecasts of a rise to 3.0% and remaining at a 13-month low.
- Markets anticipate the Bank of England Monetary Policy Committee will vote 7-2 to keep interest rates unchanged at 3.75% at Thursday's meeting.
- A BoE survey last week found public inflation expectations for five years ahead at 3.9%, the highest level since at least 2009.
May inflation reading before BoE meeting
As reported by Reuters, official figures released on Wednesday show British inflation at 2.8% in May, unchanged from the 13-month low recorded in April. The data comes a day before the Bank of England is due to announce its next interest rate decision.Economists polled by Reuters had expected inflation to rise to 3.0% in May. Instead, the unchanged reading suggests price pressures are not accelerating as forecast, even as the U.S.-Iran war keeps British inflation almost a percentage point above the BoE's January projection.
Inflation has stayed above the central bank's 2% target for most of the past five years. In April, the BoE says inflation is likely to rise above 3.5% by the end of the year and could exceed 6% early next year under the most adverse of its three scenarios.
Energy exposure shapes UK price outlook
Financial markets this week draw some comfort from an apparent deal between the U.S. and Iran that promises to reopen the Strait of Hormuz, a major route for oil exports, and is due to be signed in Switzerland on Friday. Britain is more affected than many Western countries by the conflict because of its reliance on imported natural gas.Economists expect the BoE's Monetary Policy Committee to vote 7-2 to keep interest rates unchanged at 3.75%. While Governor Andrew Bailey says the central bank has time to assess the impact of the conflict, some policymakers worry companies may use it to lift prices more broadly or that it could weaken household confidence in the BoE's inflation target.
A quarterly BoE survey released last week shows the public's expectations for inflation in five years' time at 3.9%, the highest since the series began in 2009.
In our previous coverage of the Iran agreement progress and expected oil-sanctions relief, we explained how the memorandum moving toward a Friday signing helped push Brent below $80 and improved risk appetite in markets. We also noted investors rotating into cyclical shares as energy prices fell, while major tech names lagged amid a chipmaker-led selloff.
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