UK Inflation Hits 2% Target For First Time In 3 Years, But It Is 'Unlikely To Convince' Central Bank To Cut Rates Just Yet, Says Mohamed El-Erian

The UK’s inflation rate has finally hit the Bank of England’s target of 2%, marking the first time in nearly three years. However, this development may not be enough to prompt immediate rate cuts, according to a prominent economist.

What Happened: The Consumer Prices Index rose by 2% in May compared to the previous year, as reported by the Office for National Statistics on Wednesday. This figure aligns with the expectations of economists, noted Mohamed El-Erian, the chief economic adviser at Allianz.

“The 2% figure is unlikely to convince the central bank to cut rates tomorrow given a number of issues, and not just because core inflation is still high at 3.5% due to sticky services price increases (5.7% for May),” El-Erian wrote on X.

This development comes at a time when the UK is grappling with a significant increase in the cost of living – at one point in 2022, inflation soared to over 11% due to the war in Ukraine and the end of pandemic restrictions.

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Despite hitting the 2% target, the BOE is still monitoring the situation for signs of persistent inflation. Investors and economists expect BOE Governor Andrew Bailey to maintain the benchmark rate at a 16-year high of 5.25% when the next decision is announced on Thursday, according to Bloomberg.

Why It Matters: The UK’s inflation hitting the 2% target is a significant development, especially in the current global economic context. Major central banks, including the Bank of Canada and the European Central Bank, have already started cutting interest rates in response to economic challenges.

Meanwhile, in the U.S., the Federal Reserve has been under pressure to initiate rate cuts to prevent potential economic instability. The Fed’s inaction has sparked concerns about the risk of triggering a recession, as highlighted by economist Claudia Sahm, the creator of the “Sahm Rule.”

Meanwhile, the People’s Bank of China has opted to keep its interest rates unchanged for the tenth consecutive month to stabilize the yuan and manage liquidity. This decision reflects the economic uncertainty and the need to maintain financial stability.

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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote