UK inflation stays at 2% target in June, leaving possible rate cut on a 'knife edge'

Inflation in the U.K. held steady at the Bank of England’s target rate of 2% in June

Britain Economy (Copyright 2023 The Associated Press. All rights reserved)

Inflation in the U.K. held steady at the Bank of England's target rate of 2% in the year to June, official figures showed Wednesday, in a development that could be enough for policymakers to cut borrowing costs next month.

The Office for National Statistics said the largest upward contribution to the annualized inflation rate came from restaurants and hotels, with some economists attributing the increases to Taylor Swift's tour of the U.K. The biggest downward contribution came from clothing and footwear, with widespread sales during the month.

The flat reading compared to June a year ago was a tad higher than expected. Most economists had anticipated a modest decline to 1.9%.

The last time inflation was at 2% was in July 2021 before prices started to shoot up, first as a result of supply chain issues during the coronavirus pandemic and then because of Russia’s invasion of Ukraine, which pushed up energy costs.

Financial markets think it's going to be a close call as to whether the Bank of England will reduce its main interest rate from 5.25% on Aug. 1.

Some policymakers are still concerned over the scale of price rises in the crucial services sector and the pace of wage increases, which raise the risks of an inflation rebound if interest rates are cut too soon.

“Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge," said Luke Bartholomew, deputy chief economist at asset management firm abrdn, formerly Aberdeen Asset Management. "More fundamentally, the ongoing stickiness of services inflation will leave the Bank wondering how long inflation will stay at the 2% target

The Bank of England, like the U.S. Fed and other central banks, raised interest rates aggressively in late 2021 from near zero to counter the rapid increase in inflation, which hit a peak of above 11% in late 2022.

Higher interest rates — which cool the economy by making it more expensive to borrow — have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.

Prime Minister Keir Starmer has stressed that upping the U.K.’s economic growth will be the driving mission of his Labour government. Later Wednesday, his government will announce its plans for the coming year. Starmer said the measures announced in the King’s Speech to Parliament would “take the brakes off Britain” and “create wealth for people up and down the country” by spurring economic growth.