No more interest rate cuts expected as inflation runs ‘miles above target’
No further interest rate cuts are expected to be made this year after inflation in the year to July was higher than economists forecast.
Markets had priced in a 50 per cent chance of an interest rate cut being made at the Bank of England’s November meeting before fresh price growth data was published on Wednesday morning.
But investors rapidly cut expectations and now believe it is more likely that interest rates will be held at four per cent, with inflation proving to be stickier than most economists forecast.
The Bank of England’s early August forecast correctly predicted inflation in July would be 3.8 per cent.
Services inflation, however, was higher than Bank forecasts at five per cent but this was partly due to higher airfares in a busy holiday period for British families.
ING economist James Smith said a “larger-than-usual” rise in airfares could be ignored by the Bank of England.
A three-way split on the Bank’s Monetary Policy Committee (MPC) earlier this month left analysts across the City on edge as it pointed to divided opinions on the effects of a weakened jobs market and high inflation, partly driven by a larger rise in food prices.
Food prices ticked up by 4.9 per cent over 12 months due to packaging taxes and higher commodity prices for coffee and oranges, which could worry Bank officials.
Interest rate cut voters take ‘battering’
UK inflation is expected to rise higher to four per cent in September, with food prices rising further.
Deutsche Bank’s Sanjary Raja said the trade-off between a weakened jobs market and high inflation may force the MPC to “look for more patience” as it makes interest rates decisions.
Pantheon Macroeconomics, which called for interest rates to be held before the August decision, said doves on the MPC had “taken a battering” given inflation remained high and GDP figures beat consensus predictions.
“It is easy to forget that inflation in July was also well above the MPC’s expectations just a few months ago in the May Monetary Policy Report for instance, which projected headline inflation of 3.4 per cent, and services consumer price index (CPI) of 4.7 per cent,” Pantheon Macroeconomics’ Elliott Jordan-Doak said.
“The big picture remains that inflation is set to stay miles above target for the foreseeable future.”
Hargreaves Lansdown’s Susannah Streeter said the Bank may also be concerned about the reliability of ONS numbers after it delayed the release of retail sales, which was due on Friday.
“There will also be niggles of worry about the reliability of the data they can work with going forward,” Streeter said.
“Borrowers look set to need lots more patience, given another interest rate cut is not likely in the next few months.
“It’s touch and go for December, with a reduction not fully priced in by financial markets until the spring.”