If you were looking for more evidence to support the contention that the “Boris bounce” may not materialize and that the BoE will thereby be forced to cut rates sooner rather than later, you got it on Wednesday.
UK inflation fell to 1.3% YoY in December, versus an expected 1.5%. That is the most sluggish since November 2016. The headline gauge hasn’t been above target (2%) since July.
Core, meanwhile, printed just 1.4%, a country mile below the 1.7% the market was looking for.
This comes on the heels of dovish banter from policymakers, who earlier this week stoked rate cut bets amid other signs of economic deceleration, including monthly GDP data which showed the economy unexpectedly shrank in November.
The post-election surge in the pound is (basically) history. 10-year gilt yields are the lowest since November.
Economic reality and the prospect of arduous trade negotiations with the EU are weighing on sentiment, and on Wednesday, Michael Saunders ramped up calls for accommodation.
“If we defer easing near term and, in the event of persistent economic weakness, face the need for greater easing later on, then risks of a low inflation trap, which would certainly not be a benign outcome, would rise”, Saunders said, during a speech in Northern Ireland.
That, after recent dovish comments from Gertjan Vlieghe and Silvana Tenreyro, who expressed some concern about the economy late last week.
The pound has retreated 1.8% in 2020, after posting the best quarter since 2009 in Q4 of 2019, amid Brexit jostling and political tumult which culminated in the landslide Conservative victory in December.
As Bloomberg notes, “traders are now pricing in a more than 60% chance of a cut in January, up from 44% on Tuesday [and] a move by May is now almost fully priced in”.