DAVY VIEW

UK inflation was rapid in June, especially for core inflation which grew 0.4% compared to May and double the consensus expectation of 0.2%. In annual terms, overall and core inflation of 3.6% and 3.7% respectively are well above the Bank of England’s target for 2% inflation. Services inflation and wage growth also remain elevated. Despite these factors and a relatively favourable start to this year for the UK economy – especially for household spending, which has benefitted from real wage increases – there is a widespread expectation for two cuts to Bank Rate in H2. We continue to expect one cut based on high inflation and wage growth. However, if the UK economy weakens again in H2 due to the spectre of tax increases in the October Budget, a second cut may yet prove warranted.