The latest UK services inflation data for April showed a higher-than-expected figure of 5.9%, prompting financial institution ING to suggest that the likelihood of the Bank of England (BoE) reducing interest rates in June has diminished.
The reported rate exceeded not only the consensus forecast of 5.4% but also the BoE's projection of 5.5% and ING's own estimate of 5.6%.
The significant rise in services inflation, which is a key indicator for the BoE, was driven by substantial increases in rents and a variety of other service-sector categories.
ING noted that this pattern mirrored a similar occurrence in April of the previous year, which was later attributed to updates in social rents by the Office for National Statistics (ONS), updated quarterly. Despite the unexpected rise, ING cautioned against interpreting the data as indicative of a long-term inflation trend, attributing much of the increase to annual price adjustments.
Today's inflation data also revealed that the headline Consumer Price Index (CPI) for April fell to 2.3% from 3.2% in March. ING maintains that the CPI will likely drop below the BoE's target with the release of May's data and hover around 2% for the remainder of the year.
The anticipated decrease should be supported by an expected reduction in household energy bills in July and possible limited disinflation in food and core goods.
While ING does not view the April services inflation figures as a game-changer for the BoE's monetary policy, it believes the data reduces the probability of an interest rate cut at the upcoming June meeting.
The firm also pointed out the BoE's internal division and the scarcity of public commentary from its committee members, making it challenging to forecast the outcome of the rate decision.
ING maintains its position that the first rate cut by the BoE will likely occur in August, after another set of inflation data is released, allowing for a more confident assessment of the inflation trend.
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