The FTSE 100 dipped on Wednesday after UK inflation data made a Bank of England rate cut in August less likely.
Many investors were hoping the stars are aligning for a reduction in borrowing costs and today’s data will only serve to dash these hopes.
“UK stocks took a tumble after components of the latest inflation data lowered the chances of a near-term interest rate cut from the Bank of England,” said Dan Coatsworth, investment analyst at AJ Bell.
“Services inflation still looks too high for comfort. The Bank has long said it is data-driven and today’s numbers don’t look soft enough across the board to convince the policy committee to change gear.
UK inflation remained steady at 2% – the Bank of England’s target – yet the reading was higher than expected, fuelling doubts about the trajectory of inflation in the coming months.
“The BoE hawks take the victory. UK inflation held steady at 2% in June, slightly above expectations, driven by rising hotel and restaurant prices, while clothing prices fell. This persistent inflation reduces the likelihood of an August rate cut, with markets reacting cautiously. Further wage data on Thursday will be crucial in shaping future monetary policy decisions,” said Sam North, analyst at investment platform eToro.
“The GBP initially spiked higher before pulling back to pre-release levels. For those hawkish BOE members, the ones who wanted to see the central bank keep things on hold again next month, this is exactly what they would have wanted to see. Whilst services inflation was higher, it wasn’t higher than the previous month. A silver lining for the dove maybe but I would be surprised now to see the BOE cut rates on August 1st.”
The Bank of England has been clear that it wants to see sustained evidence of falling inflation, and the figures released this morning do not fit the bill.
The disappointment with this morning’s release was evident in UK-centric stocks with retailers including JD Sports, Frasers Group and Next among the top fallers.
Although there will be concerns about borrowing costs and the impact on the real economy, some of the FTSE 100’s weakness on Wednesday can be attributed to the stronger pound that weighed on mega-cap overseas earners such as AstraZeneca.
Antofagasta was the top faller, down 4%, as the copper miner followed the recent trend of releasing poor production updates. Despite production rising 20% in the last quarter, full-year production is down, and the group lowered its guidance for the year.