The UK economy appears to be back in “normal” territory. Unlike most European economies, it has an unemployment rate close to 4%, an inflation rate between 2% and 3% and a GDP growth rate which has an average 2.2% over the last five years. However, the Bank of England (BoE) has been reluctant to raise the official interest rate, especially as the UK’s growth rate has fallen below 2% in recent quarters.
The annual rate of UK consumer inflation did not change in June, as higher fuel prices were offset by discounting of clothing, games and toys. Consumer price index (CPI) figures released by the Office of National Statistics (ONS) indicated seasonally-adjusted consumer prices remained unchanged on average over the month, which is less than the +0.2% increase expected and well down on April’s comparable figure of 0.4%. On a 12-month basis, the consumer inflation rate remained unchanged at 2.4% (seasonally adjusted) for a third consecutive month.
Although the figures were considerably less than expected, Westpac’s Finance AM team said the likelihood of an increase in the UK’s official rate “remains high…given recent BoE comments.” UK bond markets reacted by sending gilt yields and sterling lower. 5-year and 10-year yields each fell by 3bps to 0.99% and 1.23% respectively while the pound was weaker against other major currencies.