Hopes of a summer interest rate cut faded further yesterday despite inflation falling to its 2 percent target for the first time in almost three years.
The Bank of England is widely expected to leave rates unchanged when its officials meet today.
And despite the joy that yesterday’s inflation numbers brought, markets are increasingly convinced that they will remain at the same level at their next meeting in August.
This is likely to disappoint millions of borrowers after the Bank – led by Governor Andrew Bailey (pictured) – strongly hinted earlier in the year that a summer rate cut was on the cards.
Caution: Bank of England expected to leave interest rates unchanged when officials meet today
Data from the Office for National Statistics (ONS) showed consumer price index (CPI) inflation fell to 2 per cent in May, down from 2.3 per cent in April.
It means the UK has beaten both the eurozone and the US in the race to reduce inflation.
In the single currency area it is 2.6 percent and in the United States it is 3.3 percent.
Prime Minister Rishi Sunak said it was evidence his economic policies were working and urged voters not to “put all that progress with the Labor Party at risk”.
But even though the inflation target was met, markets see a 95 percent chance that rates will remain unchanged today.
And the chances of a cut in August have dropped to less than 30 percent.
Instead, traders are betting that the Bank’s first move will come in September and a new cut will likely be made at the end of the year.
That’s because inflation in the services sector – which rate-setters have said they are monitoring closely – is proving harder to reduce than the headline rate.
In May, 5.7 percent was higher than economists expected.
The Bank also predicts that the headline CPI will rise again later this year. He also fears strong wage growth – 6 percent – that could fuel further price increases.
However, reaching the 2 percent inflation target – for the first time since July 2021 – still represents a watershed moment after a prolonged crisis that saw it soar to over 11 percent in the fall of 2022.
This was fueled by the Russian invasion of Ukraine, which raised energy and food prices.
Food inflation had reached a staggering 19.2 percent in March last year, but has fallen to 1.7 percent, the lowest level since October 2021).
Sanjay Raja, economist at Deutsche Bank, said: “The UK has won the race to get headline CPI back on target, albeit temporarily.
While calls for an imminent rate cut will increase, given the headline CPI decline to 2 percent, there are likely to be growing concerns around the stickiness surrounding services inflation.
Today’s decision will be scrutinized particularly closely because rate-setting officials, who normally convey their ideas to markets through regular speeches, have been silent since the general election was called.