UK Inflation Hits Three-Year Low, RBNZ Surprises With Rate Hike Debate

May 22, 2024 23:16

UK’s inflation dropped in April but not as much as anticipated, pushing back a potential interest rate reduction by the Bank of England next month. However, the Reserve Bank of New Zealand (RBNZ) surprised economists even more as its governing board reported that it discussed an interest rate hike in its last monetary policy meeting.

UK CPI Inflation Falls But Less Than Expected

A report released by the Office for National Statistics (ONS) showed that headline inflation in the UK fell to 2.3% in April  on a year-to-year basis. The figure was higher than expected on the back of an elevated services inflation reading. According to the ONS report, this was the lowest inflation reading recorded since July 2021.

However, some economists suggest that the possibility for an interest rate cut by the BoE in June shrunk. The BoE’s board is concerned that rapid wage growth, which makes up much of the inflation rate in the services sector, could sustain inflationary pressures across the economy.

RBNZ Shocks With Rate Rise Talk

The RBNZ governing board decided to keep interest rates on hold as it was expected by market analysts. What wasn’t expected was the debate between policymakers regarding a potential interest rate hike while many economists thought that the bank would refrain from tightening its monetary policy.

In the post-meeting press conference, RBNZ’s Governor Adrian Orr confirmed that “we had a real consideration on raising rates at this meeting,” adding that it would take time for domestic inflation to decline. The RBNZ’s board expects inflation to fall back into target band by the end 2024.

IMF Raises UK Growth Forecast

The International Monetary Fund announced that it has raised its forecast for UK growth in 2024. The IMF is now forecasting the UK economy will expand by 0.7% in 2024, slightly up from its 0.5% forecast as suggested in its World Economic Outlook published in April. It still expects growth of 1.5% next year, as “disinflation buoys real incomes and financial conditions ease.”

IMF’s economist forecast UK inflation would come close to the BoE’s 2% target in 2025. On monetary policy, she says the Bank of England has reached an inflection point on interest rates. The IMF suggests interest rate cuts of 50 basis points to 75 basis points in 2024 “would be appropriate.” Some market analysts see two cuts this year, which would bring the benchmark interest rate down from 5.25% to 4.75% by December.

Canada CPI Inflation Falls To 3-Year Low

Over in Canada, inflation fell to a three-year low in a sign that inflationary pressures are easing. Canada’s Consumer Price Index (CPI) rose 2.7% on an annualised basis in April, down from 2.9% in March. That’s the lowest rate since March 2021.

Economists at CIBC noted that “today's data should have provided the all clear on the inflation front that the Bank of Canada needed to start cutting interest rates in June. At the time of the April interest rate decision, the Bank of Canada governor stated that policymakers were encouraged by recent subdued inflation readings but needed those to persist for longer before cutting interest rates."

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Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.