The Bank of England policymaker confirmed that the disinflation process is still happening. All members of the Monetary Policy Committee agree, except one who sees more risks ahead. Supply chain data shows clearer signs of disinflation than complex wage data. Core inflation, which stalled at 3.2%, has now risen to 3.8%. Current observations suggest that inflation is slowly declining, though this decline isn’t as smooth as expected. The increase in core inflation from 3.2% to 3.8% indicates that domestic price pressures might not be easing consistently. Wage data remains tricky to interpret due to distortions and delays, but supply chain improvements have led to lower goods prices—an early sign of reduced cost pressures in some economic areas. One Committee member is more aware of the possibility that inflation may drop more than expected. This could lead to greater room for easing later this year. This viewpoint contrasts with the broader agreement among Committee members, who all acknowledge that prices are generally heading downward. Given this division in perspectives and the recent rise in core inflation, we can expect future policy decisions to be more staggered. It’s not the right time for large directional positions. Instead, it’s wiser to focus on short-term interest rate volatility rather than making bold bets on rates. This is especially true since upcoming data, particularly on wage growth, will significantly influence how the markets adjust to any future policy changes. Price movements in short sterling futures reveal uncertainty about when the first rate cut might happen. The latest adjustments show the market stepping back from earlier optimism. We also observe an increase in near-term implied volatility, as traders begin to hedge against a slower policy response, which aligns with the inflation data trends. Some risks still depend on global factors, especially energy and trade, but our main focus is on the domestic situation. The main drivers of inflation now come from services, meaning wage data, despite its noise, will remain in the spotlight. Policymakers are cautious and may change their approach depending on how clear the next data reports are. For now, we are actively engaged in the middle of the curve, favoring strategies that benefit from a steeper front end. This reflects our belief that the Bank will hold off on aggressive actions until more solid evidence of disinflation appears. Policy is not predetermined, and the current market environment requires flexibility.

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