Mitsubishi UFJ: Inflation in the UK services sector will continue to drive the pound stronger

The Bank of England’s last policy meeting opened the door to interest rate cuts starting in the summer, but since then these expectations have been curbed by the unexpected rise in service sector inflation in April. Service sector inflation unexpectedly remained at 5.9%, while overall inflation fell back to near the Bank of England’s target of 2.3% driven by falling energy prices. If service sector inflation continues in May, it will cast doubt on the likelihood of the Bank of England cutting rates in August and encourage a stronger pound. In our base scenario, we expect the Bank of England to vote to keep rates unchanged next week, with the number of dissenting votes unchanged, and Ding Granda and Ramsden voting in favor of a rate cut.