UK inflation strengthens call for further rate hikes

Britain’s inflation rate remained markedly stronger than expected in April, though lower than the previous reading, recording the biggest increase over more than three decades in the services and core prices, putting more pressure on the Bank of England (BoE) to keep raising interest rates.

UK inflation declined from 10.1 per cent in March to 8.7 per cent in April, coming in above the consensus of 8.2 per cent and the BoE’s forecast of 8.4 per cent. Even though energy and food prices are moderating, core inflation accelerated from 6.2 per cent in March to 6.8 per cent in April, above the consensus of 6.2 per cent and the highest rate since March 1992.

Inflation is more likely to end the year above five per cent, prompting the central bank to push interest rates up from the current 4.5 per cent towards 5.5 per cent according to market expectations.

Meanwhile, the minutes of the May meeting of the interest rate setting committee of the Federal Reserve, that were released on Wednesday, indicated uncertainty about the outlook for interest rates.

Fed officials “generally agreed” that future rate hike uncertainty had increased and preferred to keep policy options open as high inflation persists and the impact from the banking crisis remains clouded, according to the minutes.

With Fed economists predicting a mild recession later in 2023, some policymakers “saw evidence that the past year’s tightening was beginning to have its intended impact”, with “almost all participants” seeing risks to economic growth due to a tightening of bank credit after a series of bank failures earlier this year.

Finally, German business morale in May fell more than expected, mostly due to a sharp fall in future expectations, as Europe’s largest economy is still facing economic difficulties, a survey showed on Wednesday.

Germany’s closely-watched leading indicator, the Ifo index, declined for the first time after expanding over the last six consecutive months, coming in at 91.7 in May from 93.6 in April.

“The first drop in the Ifo index after a six-month rally is further confirmation of fading optimism and new growth concerns,” ING economist Carsten Brzeski said.

This article does not constitute legal and/or financial advice and is being issued for information purposes only by Bank of Valletta plc, 58, Zachary Street, Valletta. Bank of Valletta is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap. 370 of the Laws of Malta).