Bank of England August Rate Cut in Jeopardy on Global Inflation Warning Signs

Bank of England Governor Bailey might not be able to cut interest rates in August. File image of Andrew Bailey, credit: Bank of England.

The Bank of England might not be able to cut interest rates in August if warning signs in global inflation trends are heeded by the Monetary Policy Committee.

According to this week's figures from Canada and Australia, global inflation could be heating up again. In Canada inflation unexpectedly rose 0.6% month-on-month in May, more than doubling the expected amount. In Australia, the monthly CPI indicator rose for a third consecutive month at 4.0% year-on-year.

"Australian price growth accelerated to its fastest in six months in May, knocking markets off balance and raising the likelihood of another rate hike this year," says Karl Schamotta, Chief Market Strategist at Corpay.

In both countries, the core inflation rate that the respective central banks like to watch showed building pressures. While inflation from these countries might not typically impact global markets, we have seen some contagion as global bond yields have risen sharply in response.

"The Canadian inflation print yesterday was emblematic of the situation we see brewing in many countries around the world these days which is one where we have very sticky inflation that refuses to go down further and moderating growth," says Brad Bechtel, Global Head of FX at Jefferies.

Rising global bond yields is a clear signal that investors are worried that a universal trend is underway and that central banks might be unable to cut interest rates anytime soon. Indeed, the odds of another rate hike at the Reserve Bank of Australia have risen to 60%.

"Inflation is firm enough to get central banks to pause and reassess before they cut further or even begin their easing cycles. The likes of the US, Norway, Australia, UK haven't even started their easing cycles yet and bit by bit they keep getting pushed out further and further," says Bechtel.

Markets entered the week with a 60% expectation the Bank of England will cut interest rates in August after last week's MPC meeting showed members were close to cutting interest rates.

UK inflation has fallen back to the target 2.0% rate, but core inflation and services inflation is running too hot for this to be sustained.

The Bank and institutional economists expect inflation to pick up again.

But, the experience of other nations could mean an August rate cut is still too early.

"This trend is something to keep an eye on for now," says Bechtel.