UK CPI Inflation Data and Spring Statement in Focus

Tomorrow welcomes the UK February CPI inflation print (Consumer Price Index) at 7:00 am GMT, followed by UK Chancellor Rachel Reeves claiming the spotlight with her Spring Statement. The Statement is expected to be announced around 12:30 pm GMT, following Prime Minister’s Questions.

Inflation Expected to Cool

Price pressures are still too high despite year-on-year (YY) CPI inflation poised to moderately cool in February. According to the median estimate provided by Refinitiv, YY headline CPI inflation is expected to have eased to 2.9% from 3.0% in January (estimate range between 3.1% and 2.7%), while month-on-month (MM) CPI is forecast to have risen by 0.5% in February from -0.1% in January. YY core CPI – excluding energy, food, alcohol and tobacco – is also expected to have slightly cooled to 3.6% from 3.7% (estimate range between 3.8% and 3.5%), with MM core CPI projected to have risen by 0.5% from -0.4%. YY services inflation is forecast to have eased by 4.9% from 5.0%, while MM services inflation is anticipated to have increased by 0.5% from -0.2%.

Weak Growth and the BoE is Not Rushing to Cut Rates

Despite a period of stronger GDP growth (Gross Domestic Product) in the first half of 2024, the UK economy experienced a significant slowdown in the second half. In Q4 24, the economy unexpectedly grew by 0.1%, following no growth in Q3 24. Between December 2024 and January, growth also fell by 0.1%, following 0.4% expansion.

The Bank of England (BoE) made it clear that they are in no hurry to resume easing policy at this point, maintaining the bank rate at 4.5% last week. This decision did not raise many eyebrows as it was widely expected across the board. The Monetary Policy Committee’s (MPC) vote split, on the other hand, did deliver a surprise with Swati Dhingra (known dove) being the only member advocating for a 25 bp (basis point) reduction.

Forward guidance was somewhat limited at the last meeting, with a ‘gradual and careful’ approach maintained towards rate cuts. Money market expectations suggest the central bank is likely to remain on hold until August’s meeting, with only 40 bps of easing priced in for the year at this point.

Despite stagflation risks – elevated inflation coupled with lacklustre growth – the British pound (GBP) has outperformed against the majority of its G10 peers over the last month. Given this strength, a miss in the UK CPI data tomorrow that exceeds or meets estimate lows might prompt GBP shorts.

UK Spring Statement: Spending Squeeze Eyed

Chancellor Reeves is set to make headlines tomorrow with her first Spring Statement. Traditionally, these Statements are not major events and rarely include significant policy announcements. However, this upcoming announcement, which is expected to last about 20-25 minutes, has evolved into a major fiscal event, drawing close attention from markets and economists.

Spring Statements provide Members of Parliament (MPs) with fresh forecasts from the OBR (Office for Budget Responsibility) and publish an update about the health of the UK economy since the last budget meeting. You will recall that in the last budget, Reeves announced a £40 billion tax raid – including a £25 billion national insurance rise. The Statement is certainly not a ’formal budget’, which is more substantial and involves setting out economic policies for the year ahead.

One of the key points in tomorrow’s Statement is the amount of fiscal headroom available, which refers to the money the government has left to spend. After the last budget, the Chancellor had approximately £10 billion in headroom. In order for Reeves to adhere to her fiscal rules, she will not borrow additional funds. Reeves has also ruled out any changes to taxes, stating that the Statement will not be a ‘tax and spend’ event.

Given soft economic growth and higher borrowing costs, fiscal headroom is expected to be limited, leading to anticipated spending cuts in the Statement to help meet the fiscal rules. Labour recently announced a ‘reform package’ that is projected to save around £5 billion from its welfare budget by 2029-30. This will enhance the Chancellor’s fiscal headroom. Reeves has also committed to reducing the costs of running the government by 15%, which could result in approximately 10,000 job losses in the Civil Service.

The OBR will also publish its latest forecasts, which is expected to provide gloomy reading. Growth forecasts from the OBR will be particularly interesting and are currently predicted to be lower this year and in 2026, to around 1.0% (from 2.0%) and 1.5% (from 1.8%), respectively. While Reeves is partly to blame for this I feel, she will undoubtedly point the finger at global uncertainty. The downgrade in growth forecasts will also be considered a significant blow for UK Prime Minister Kier Starmer, who, as I am sure you are aware, made economic growth one of his major priorities.

What Could the Statement Mean for the GBP?

First and foremost, any surprising announcements from the Chancellor could lead to significant volatility for the GBP. Should Reeves suggest the prospect of tax increases and paint a bleak picture of the UK’s economy, we can expect the GBP to sell off across the G10 space. Furthermore, if the OBR growth forecasts come in lower than current consensus, this could also weigh on the GBP.

Francesco Pesole, strategist at ING, commented: ‘If they want to go a bit bigger on spending cuts to prevent that gilt market instability, then the risk is markets will have to reprice growth (lower) quite sharply. If that happens, that’s still a negative for sterling’.

Technically, however, I am seeing mixed signals. Versus the US dollar, the GBP has room to run to at least monthly resistance from US$1.3111, with the daily chart also exhibiting scope to approach resistance at US$1.3046. Against the euro (EUR), nevertheless, the GBP is poised for weakness, with the EUR/GBP cross setting up for an AB=CD bullish pattern around £0.8331 – a 1.272% Fibonacci projection ratio.

Written by FP Markets Market Analyst Aaron Hill

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