British Inflation Steadies Amid Middle East Conflict

In a development that aligns with expectations, British inflation eased in May to an annual rate of 3.4%, marking a steadying point for the economy. This cooling of inflation aligns with the forecasts from the Bank of England, which is anticipated to hold interest rates steady this week. The decision comes as the bank carefully navigates the turbulent international energy markets, particularly affected by the escalating conflict in the Middle East.

The data, released by the Office for National Statistics, leaves interest rate projections unchanged, as economists and investors expect the Bank of England to maintain its current borrowing costs during its upcoming June policy meeting. Following the data's release, the British pound edged slightly higher against the U.S. dollar, while government bond yields fell, notably outperforming their German and U.S. counterparts. Notably, Britain leads with the highest inflation rate among 16 Western European economies that reported comparable EU-harmonised data for May.

Geopolitical concerns are now in the spotlight. Deutsche Bank's chief UK economist, Sanjay Raja, highlighted concerns that rising energy prices could further complicate the BoE's mandate to control inflation expectations. Despite these challenges, a weakening jobs market in the UK may provide some relief to inflation pressures. Looking ahead, market sentiments indicate a 90% likelihood of the BoE holding rates steady this week, with some pointing to possible rate cuts by the end of the year.

(With inputs from agencies.)