Most economic and housing analysts believe another base rate rise is on the cards for next month – but the sharp increases predicted recently may not come to pass.
Yesterday’s inflation figures showed the headline Consumer Price Index inflation down to 7.9 per cent in June – a steeper fall than expected from 8.7 per cent in May. Core inflation, stripping out energy, food, alcohol and tobacco, fell but only from 7.1 per cent in May to 6.9 per cent in June.
The rate of food inflation fell to 17.3 per cent in June from 18.3 in May. Also falling was the cost of raw materials – they dropped 2.7% in price – the first time they’ve actually become cheaper since late 2020 according to the Office for National Statistics.
“Given this is coming on the back of worrying high wage inflation figures, the Bank of England isn’t going to step away from the interest rate rise lever just yet, so another hike may well be on the cards for August” cautions Sarah Coles of business consultancy Hargreaves Lansdown. But she adds: “However, falling inflation may mean the Bank isn’t tempted to lean so hard on this lever in the coming months, and this in itself is enough to move markets. Savers and mortgage borrowers won’t have to wait for the next rate decision for this to have an impact, because a change in expectations themselves would be significant.”
Yael Selfin, chief economist at KPMG UK, says that while inflation was likely to continue falling in the coming months, it would not return to the Bank of England’s 2.0 per cent target before early 2025. As such, the Bank is “unlikely to substantially change its hawkish policy stance” on interest rates in the short term.
Thomas Pugh, economist at tax consultancy RSM UK, says: “We think [these] inflation numbers, combined with the first signs that the labour market is easing, mean the Bank of England can go with a quarter-point hike at its next meeting on August 3. We think inflation will continue to decline from here as lower energy and goods prices continue to feed through.”
Derrick Dunne, chief executive of YOU Asset Management, adds: “CPI inflation might have fallen sharply in the 12 months to June, but savers and investors should hold off celebrating just yet. With inflation still nearly four times the Bank of England’s 2.0 per cent target – and with wage growth continuing to climb – we cannot rule out another interest rate hike come August. We know that rate rises are the main weapon for central banks to discourage consumer spending.”
