The combination of rising headline and underlying inflation and steady unemployment at 4.7% has complicated the BoE’s policy stance.
Despite today’s GDP data, the BoE would likely need to see inflation soften sharply and wage growth to soften furhther to give the BoE doves a stronger case to cut rates.
Against this backdrop, ING Economics noted:
“Inflation needs to show further progress, and on headline CPI at least, that is unlikely before November… But the news isn’t all bad. The Bank ultimately cares most about service sector inflation, and we think there is scope for this to modestly undershoot the BoE’s forecasts before November. Rapidly slowing rental growth is a key driver.”
On the labor market, ING Economics suggested that slower wage growth could potentially adjust the BoE’s rate path.
Elevated inflation and interest rates, and softer wage growth could materially impact disposable income and the economy.
Will next week’s inflation and labor market data confirm the need for action? UK inflation and labor market data are due out on September 15 and September 17, respectively.
A sharp drop in inflation and wages could potentially green light a November BoE rate cut. Rising expectations of a November rate cut would likely weigh on the GBP/USD, exposing sub-$1.35.
GBP/USD Reaction to July’s GDP Report
Ahead of the UK GDP report, the GBP/USD briefly climbed to a high of $1.35804 before falling to a low of $1.35521.
However, in response to the report, the GBP/USD tumbled from $1.35580 to a low of $1.35496, reflecting sentiment toward the economic slowdown.
On Friday, September 12, the GBP/USD was down 0.15% to $1.35507. The BoE’s complicated policy outlook contrasts with the US Federal Reserve, widely expected to cut rates next week.
