Terrible CPI print confirms BoE has more work to do

GBP: UK inflation drops much less than expected

There has been high anticipation for some time of the impending drop in UK CPI as the energy base effect starts to unwind but the data this morning is hugely disappointing with the start of the unwind of the energy base effect being offset by considerably stronger inflationary pressures elsewhere. There can be no sugar-coating of this data and it’s a terrible inflation print that really sets the UK apart from other major developed economies in having a more serious inflation problem. The BoE will inevitably hike again in June and potentially in August as well.

As expected, the CPI data revealed a marked drop in the household utility bill component with the annual rate declining from 90.6% to 25.8%. There will be more to come on that component coming down in July m/m when OFGEM sets the new price cap (to be announced tomorrow) and is expected to mean a 20% m/m drop in the cap. But this decline was offset by other areas of the CPI basket. Food, alcohol and tobacco saw another increase (tax played a part here) with food inflation coming down only marginally from 19.6% to 19.3%. Overall goods inflation slowed from 12.8% to 10.0% but there were many areas that saw m/m accelerations. Housing (due to rents), health, transport, communications, and recreation all recorded pick-ups in the rate of m/m change. The m/m change in services was 1.6%, more than double the 0.7% gain in March resulting in core CPI YoY accelerating from 6.2% to 6.8%.

One key point to make in regard to the BoE is that the forecasts published in the May Monetary Policy Report were very high and we saw a good chance that actual inflation would undershoot those projections. The Q2 YoY forecast was put at 8.2% whereas we saw scope for low 7s if the April CPI had come in as expected. This much higher print therefore only means the BoE’s projections are more likely. That should help limit the rates fallout in response to this much higher CPI print. The SONIA futures strip has incorporate one a half more rate hikes on the open this morning.    

The MPC’s projections also incorporated market pricing of one more hike which is now inevitable and there is a much higher risk now that the BoE is compelled to go again in August. GBP should be supported from this higher rates trajectory but the scale of divergence on the inflation path risks undermining policy credibility and forced rate hikes into weakening UK and global growth is a possible scenario that could also undermine GBP performance.

UK ENERGY BASE EFFECT UNWINDS BUT CPI HIGHER THAN EXPECTED

Source: Bloomberg, Macrobond & MUFG GMR

NZD: RBNZ hikes by 25bps but signals enough done

NZD/USD has dropped sharply, by close to 1.5% in response to the 25bps hike by the RBNZ today that was accompanied by a communication that was much more dovish than expected. The OIS market was fully priced for 25bps and had partially priced 50bps so the response to today’s decision and communication is a massive 30bps drop in the 2-year yield. In addition to expressing confidence that “with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target”, the RBNZ also released updated forecasts which showed that the policy rate had peaked and that the RBNZ will commence cuts in Q3 2024. The RBNZ raised its GDP profile but still showed a mild recession with contraction in Q2/Q3.

Market pricing had recently shown more conviction in expecting a rate increase today and followed the government budget announcement on 18^th May. The budget included additional spending partly to finance damage done from the cyclone. But there were also giveaways to households to counter the cost of living crisis and no doubt with a mind on the upcoming general election in less than five months. The budget resulted in a push-back on achieving a budget surplus by a year to 2026. There was also a substantial upward revision to net immigration projections that will also help lift GDP growth. The government forecast 80k more immigrants than previously and revised away three quarters of GDP contraction.

But despite the government’s fiscal policy changes, the RBNZ now puts a lot of faith in the lagged effects of monetary policy feeding through to slow the economy. Indeed, some policy members were arguing today for a pause and the vote to hike was 5-2, the first time a consensus was not achieved.

We think this decision makes sense. Inflation remains relatively high at 6.7% in Q1 and hence the markets are surprised with the RBNZ explicit guidance but given the RBNZ has been the most aggressive G10 central bank, hiking by 525bps, it has allowed itself the opportunity to pause. Global central bank tightening is going to feed through and global growth will be challenging and disinflationary later this year. Recessionary conditions that are emerging in New Zealand and subdued global growth will likely see NZD underperform within G10 although the level of interest rates will limit the downside. We expect NZD/USD to rise as the Fed pauses and the US economy weakens but weakening NZ economic conditions will temper those gains.

NZD HAS BEEN LESS RESPONSIVE TO SHORT-TERM RATES VOLATILITY

Source: Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	German Business Expectations	May	91.9	92.2	!!
GE	09:00	German Current Assessment	May	94.7	95.0	!!
GE	09:00	German Ifo Business Climate Index	May	93.0	93.6	!!!
UK	10:30	BoE Gov Bailey Speaks	--	--	--	!!!
UK	11:00	CBI Industrial Trends Orders	May	-19	-20	!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-5.7%	!
CA	13:30	Manufacturing Sales (MoM)	--	--	0.7%	!!
CA	13:30	Wholesale Sales (MoM)	--	--	-0.1%	!!
UK	14:00	BoE Gov Bailey Speaks	--	--	--	!!!
US	15:05	Treasury Secretary Yellen Speaks	--	--	--	!!
US	17:10	Fed Waller Speaks	--	--	--	!!!
US	18:00	5-Year Note Auction	--	--	3.500%	!!
EC	18:45	ECB President Lagarde Speaks	--	--	--	!!!
US	19:00	FOMC Meeting Minutes	--	--	--	!!!!
US	13:30	Private Nonfarm Payrolls	Apr	160K	189K	!!
US	13:30	U6 Unemployment Rate	Apr	6.7%	6.7%	!
US	13:30	Unemployment Rate	Apr	3.6%	3.5%	!!!!
CA	13:30	Employment Change	Apr	20.0K	34.7K	!!!!
CA	13:30	Unemployment Rate	Apr	5.1%	5.0%	!!
US	18:00	Fed Governor Cook Speaks	--	--	--	!!
US	20:00	Consumer Credit	Mar	16.50B	15.29B	!

Source: Bloomberg