How inflation data weigh on central banks

Official figures show that inflation in Britain remained at an annual rate of 2.4% in May, suggesting the central bank may delay an expected rate increase.

Coming after other mixed economic figures, Wednesday’s inflation data mean the Bank of England could put off increasing its key interest rate this summer, as was previously believed.

The Bank of England wants inflation near 2%, and some thought it might soon raise its main rate by a quarter point to 0.75% to maintain that target.

Samuel Tombs, economist at Pantheon Macroeconomics, predicts inflation will gradually ease in coming months anyway, and that the economy “is still subdued by past standards.”

Wages are rising 2.8% on the year, but that improvement in living standards “lacks any real momentum,” he says.

For Europe, easy money expected to end

The ECB makes its next monetary policy announcement on Thursday, on the back of more positive inflation data.

The latest reading on Euro Area consumer prices came in at 1.9% year over year in May, the fastest increase in a year, notes BMO senior economist Jennifer Lee in a weekly economics report. “Even core inflation (which removes the impact of food, energy, alcohol and tobacco) rose 1.1%, a pace not seen in eight months,” she says. “The headline reading now satisfies the ECB’s mandate of having inflation at or near 2%.”

As a result, Lee expects comment from the central bank on unwinding its bond-buying program. “Don’t expect any details,” she adds. “Just discussion.”

With inflation on target, along with wage and economic growth, “the stars are aligning, and we stand by the call we’ve held since December,” says Lee. BMO expects the ECB will trim its monthly purchases further in the fall (from €30 billion to €15 billion), and wind up the quantitative easing program by the turn of the year.

“Rate hikes are another story, likely to be told in September 2019,” says Lee.

Read: Choosing inflation-linked over fixed-rate bonds

U.S. inflation paves way for rate hikes

In the U.S., inflation is rising slowly but surely.

“Inflation in the U.S. is creeping higher in response to tightening labour markets and some tariff pass-through to consumers,” says BMO senior economist Sal Guatieri, in a report.

The inflationary pressure could weigh toward “an upward nod” in the Fed’s dot plot, he adds. “The slow but steady upward pressure on inflation could tilt a majority of [Federal Open Market Committee] members to lift their suggested interest rate forecast, possibly penciling in two additional moves in the second half of the year,” in addition to today’s expected rate hike.

Read: Outlook for Fed rate hikes and U.S. dollar

For more details, read BMO’s Guatieri and BMO’s weekly report.

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