UK Inflation Surprise Dims Hopes for BoE Rate Cut in August; GBP/USD Spikes

UK Inflation Data Surprises BoE Doves

Higher-than-expected UK inflation data sank bets on an August BoE rate hike on Wednesday, July 16.

The UK’s annual inflation rate (headline) rose to 3.6% in June, up from 3.4% in May, with core inflation accelerating to 3.7% versus 3.5% in May.

Key Data from the Office for National Statistics included:

• The Consumer Prices Index, including owner-occupier housing costs (CPIH), rose 4.1% in the 12 months to June after increasing 4% in May.
• The largest upward contribution came from transport, particularly motor fuels, offsetting a downward contribution from housing and household services.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) increased by 4.3% in the 12 months to June, compared with 4.2% in May.
• Core CPI (excluding energy, food, alcohol, and tobacco) rose from 3.5% in the 12 months to May to 3.7% in the 12 months to June.
• The CPI services annual rate remained steady at 4.7% in June.

Hotter Inflation Clouds BoE Rate Cut Outlook

The inflation report followed weaker-than-expected GDP numbers, which had fueled speculation about a BoE rate cut. Notably, the UK economy expanded 0.5% in the three months to May, down from 0.7% in April. Meanwhile the economy contracted by 0.1% on a monthly basis, supporting a more dovish BoE policy stance.

Simon Pittaway, Senior Economist at the Resolute Foundation, commented on the GDP report, stating:

“With negative growth in the last two months of data, the UK’s late 2024/early 2025 growth spurt looks to be losing steam. You can see this more clearly in the 3m-on-3m data, which has fallen in recent months. Expect this to fall further in next month’s Q2 data as March’s upgraded monthly growth figure (0.4%) falls out of the 3m window.”

Ahead of today’s inflation figures, BoE Monetary Policy Committee member Catherine Mann remarked on inflation levels, stating:

“We have seen wage rates come down, so people are getting wage increases, but not at the rate in the past. And we’ve seen price inflation come down quite a bit, but it’s still a challenge because it’s still well above our 2% objective.”

June’s inflation numbers suggest the BoE may keep rates unchanged in August. However, May’s labor market overview report on July 17 could change the narrative.

Softer wage growth and rising unemployment may signal a pullback in consumer spending, dampening inflationary pressures. A weaker private consumption outlook may also impact the UK economy, further supporting a near-term BoE policy move. On the other hand, steady unemployment and higher wage growth may further temper BoE rate cut expectations.

GBP/USD Volatility Post-Inflation Data

Ahead of the inflation report, the GBP/USD dropped to a low of $1.33758 before rising to a high of $1.34005. Following the report, the pair briefly dipped to a low of $1.33935 before surging to a high of $1.34126.

On Wednesday, July 16, the GBP/USD was up 0.20% to $1.34065. The upswing likely reflected falling bets on an August BoE rate cut.

Looking Ahead

Traders now turn to Thursday’s UK labor market data. The Services PMI (July 24) and retail sales data (July 25) will also provide further clues on consumer spending trends and the broader economic outlook.

Weaker wage growth, slower services sector activity, and a pullback in retail sales could raise bets on further rate cuts. However, strong data may support a less dovish BoE stance, sending GBP/USD higher.

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