Bank of England Poised to Cut Rates

The UK inflation rate remained steady at 2% in June, matching the Bank of England’s target, according to the latest official figures. Discounts on clothes during summer sales helped offset rising hotel costs.

Why it matters: The unchanged inflation rate suggests that the cost of living is still increasing but at a pace the central bank is comfortable with, following nearly three years of above-target inflation that has strained household finances.

The details:

• Clothing and footwear costs fell last month, while food and drink inflation dropped sharply from recent years’ highs.
• Second-hand car costs also decreased but not as significantly as last year.
• Prices in restaurants and hotels rose compared to a year ago, with hotel prices jumping 8.8% month-over-month and restaurant and cafe prices increasing by 0.3%.
• Package holidays, cinemas, theatres, and concerts also saw rising costs.

Persistent price increases in the services sector, which includes restaurants and hairdressers, raise questions for Bank of England policymakers about when they might start cutting interest rates.

What they’re saying:

• “We face the legacy of 14 years of chaos and economic irresponsibility. That is why this government is taking the tough decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better off,” said Darren Jones, the new chief secretary to the Treasury.
• Leanne Morgan, a homeowner affected by higher mortgage rates, said, “We can’t have family holidays, we’ve not been able to do so much with the children… it affects where I shop for food, I’m always looking for discounts.”

The background: The Bank of England’s base rate, which influences borrowing costs, is at a 16-year high of 5.25% after a series of hikes to tackle soaring inflation. The overall inflation rate has fallen sharply since peaking at 11.1% in October 2022.

What’s next: The latest economic figures may influence the Bank of England’s upcoming interest rate decisions. Markets have been anticipating rate cuts starting on August 1, but recent data has made this a finely balanced decision. Investors now estimate about a 35% chance of a rate cut on that date, down from nearly 50% before the data was published.

Full story

The Bank of England is expected to cut interest rates for the first time in over four years at its August meeting, according to a recent poll of economists. The survey found that 49 out of 60 economists predict the central bank will lower rates from the current 15-year high of 5.25% to 5%. This move would make borrowing cheaper for consumers and businesses.

However, market sentiment is more divided, with 54% believing rates will remain steady and 46% anticipating a cut. Lloyds Banking Group chief executive Charlie Nunn commented on the end of the era of ultra-low interest rates. The projected effect of lower rates is already visible, with Nationwide announcing a five-year fixed-rate mortgage deal below 4%.

Bank expected to cut rates

The last interest rate cut occurred in March 2020, coinciding with the COVID-19 outbreak in the UK. Since then, the Bank of England has raised rates 14 times to manage inflation.

Despite recent declines in inflation, the Bank has maintained rates at 5.25%. Earlier polls showed stronger confidence in a rate reduction, with 97% of those surveyed in June expecting the Bank to lower rates based on the latest inflation data. Historically, markets and economists have often held opposing views, but recent trends indicate a convergence of expectations.

The Bank of England’s decision will be closely watched as it balances the need to control inflation while supporting economic growth. The upcoming meeting on August 1 will provide clarity on the central bank’s stance and the future direction of interest rates in the UK.