City investors will cut their forecasts depending on how much the Bank of England (BoE) will cut interest rates as inflation has slowed.
In March inflation fell for the second consecutive month which has fallen to 3.2% and traders will now price in for just one interest rate cut for 2024.
Ian Stewart, chief economist at Deloitte, said: “Inflation is in retreat but the Bank of England cannot yet be sure that it is beaten. Headline inflation is likely to drop below 2% in the coming months, but to be confident it will stay there wage pressures need to ease.
“With earnings growing at close to 6%, and the economy reviving, the Bank will be in no hurry to cut interest rates.”
Tomasz Wieladek, chief European economist at asset manager T. Rowe Price, said, “Together with the rising momentum in wage inflation, the sticky services inflation numbers raise the risk the UK inflation battle is far from over and perhaps not yet won.
“The MPC will be worried about this scenario, and I believe this strong reading will make the MPC cautious about cutting early in the summer.
“Indeed, given these strong domestic inflationary pressures in both wages and services, the MPC will now likely wait until late summer to get the required confidence to cut rates.”
He added, “However, there is another risk that is not yet spoken about in the UK monetary policy debate.
“If services inflation and wages continue to remain persistently at these high levels, the risk the Bank of England will have to hike this year is rising.
“After all, the Bank of England is data-dependent. If the data continue to indicate policy is not tight enough to bring inflation back to target, the MPC may have to tighten policy further.”
Ruth Gregory, deputy chief UK economist for Capital Economics, said, “The smaller-than-expected fall in CPI inflation from 3.4% in February to 3.2% in March (BoE and consensus 3.1%, CE 3.0%) and drop in the core rate from 4.5% to 4.2% (consensus & CE 4.1%) raises the risk that inflation will follow the trend in the US and soon stall.
“The chances of interest rates being cut for the first time in June are now a bit slimmer.”
