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Softer UK CPI seen supporting BoE on prolonged rate hold, TD Securities says
TD Securities flags energy pass-through risk from Ofgem’s July price cap and expects headline inflation to ease to 2.7% in June.
TD Securities expects the UK to see softer inflation in June, projecting headline CPI at 2.7% year-on-year, broadly in line with consensus but below Bank of England projections. In its outlook, headline inflation is expected to benefit from lower fuel prices offsetting still-sticky services inflation.
The firm forecasts core CPI at 2.6% year-on-year and services inflation at 3.6%, noting that airfare-related inflationary pressures could keep services from falling quickly. It also highlights that Ofgem’s July price cap increase could feed into inflation via pass-through effects.
TD Securities adds that energy is the main near term driver because it does not expect any Ofgem adjustments to electricity and gas prices in June. It estimates the y/y energy inflation rate would rise to 5.9% when including electricity and gas contributions, with further pass-through expected over subsequent months.
On the Bank of England policy path, TD points to uncertainty around the ONS price collection index date for June, which could shift the services and core readings if airfare prices are captured differently. If wages do not respond more to higher inflation, the firm says the BoE is more likely to stick with a prolonged hold at its restrictive Bank Rate rather than raise rates soon, based on lessened labour market pressure and reduced worker bargaining power.