Inflation is tamed at last – when will interest rates fall?
UK inflation may have hit the Bank of England target but it's unlikely to stay that way for long. What does that mean for interest rates?
![Bank of England Building Abstract Art Design](https://cdn.mos.cms.futurecdn.net/zauqe8KdQ7EL7gxNhRiNAR-415-80.jpg)
The UK has “won the race” in getting headline inflation back to target, says Sanjay Raja of Deutsche Bank. The annual rate of inflation hit the Bank of England’s (BoE’s) 2% price target in May for the first time since 2021. By contrast, US and Euro area inflation are running at 3.3% and 2.6% respectively.
The return to target has been helped along by falling goods prices (down an average of 1.3% over the past year) thanks to cooler food-price inflation and falling household energy tariffs. Yet the “fly in the ointment” remains stubborn price rises in the services sector, where inflation is still running at 5.7% year-on-year as high wage costs bite (average UK pay rose 6% in the year to February-April, excluding bonuses). The bad news is that UK inflation is thus unlikely to stay at 2% for long and looks likely to average 2.5% in the second half of the year.
Interest rate cuts are coming
Cooler inflation should open the door to interest rate cuts, but not straight away. Last week the BoE’s monetary policy committee again voted to hold interest rates at 5.25%. Seven committee members opted to hold, with two supporting a cut.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The minutes of the meeting marked “a significant change in tone” for the Bank, say Dearbail Jordan and Faisal Islam for the BBC. “While not a done deal”, Threadneedle Street has sent “a clear signal to the markets” that “a rate cut is now the most likely outcome at its next meeting” in August. It would thus join the European and Swiss Central Banks, which have already begun cutting rates.
At 5.7%, annual services inflation is still running at about twice the level consistent with inflation remaining at the 2% target, says Chris Dorrell for City AM. Given that obstacle, investors were “pleasantly surprised” by the Bank’s “relatively dovish tone” at the meeting (easier money is usually good news for markets). Policymakers noted that a near 10% increase in the minimum wage this spring contributed to services inflation, but that future rises are unlikely to have such a big impact.
Stretched homeowners will ask why the Bank is not already cutting borrowing costs. For one thing, slashing rates shortly before a general election would have been a bad look politically, not least because of Rishi Sunak’s attempt to claim credit for falling inflation, says David Smith in The Sunday Times. High services inflation also remains a genuine concern because “it is the closest thing we have to a measure of domestically generated inflation”.
Still, the big picture is that rates are “coming down” – whether the first cut comes in August or September. Rejoice, “better times lie ahead” for the economy. Not that those improvements will come in time to help the government – whose idea was it to call an early election?
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Revealed: the cheapest day to buy car insurance
Car insurance costs have soared by almost 50% for some drivers. But this one trick could save you hundreds. We reveal the cheapest day to buy car insurance
By Vaishali Varu Published
-
Stock market delisting: Video games firm accepts £2.1bn bid in yet another blow to the LSE
Keywords Studios has backed a cash bid worth £24.50 a share from Swedish private equity firm EQT that will see yet another firm delist from the London Stock Exchange.
By Chris Newlands Published
-
Charlie Mullins: Britain’s richest plumber launches a new venture
Plumbing tycoon and businessman Charlie Mullins aims to become the "Harrods of the handyman world".
By Stuart Watkins Published
-
Migration hits new high – how to fix it
Despite decades of broken promises from both parties, net migration is at record levels. What is to be done?
By Simon Wilson Published
-
UK universities at risk as international student numbers fall
UK universities risk going bust as international student numbers fall due to immigration restrictions. Is the education sector in trouble?
By Simon Wilson Published
-
What is the future of Royal Mail in the UK?
With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
By Simon Wilson Published
-
When will the general election be?
The general election is likely to be sometime in 2024 and Keir Starmer is the favourite to win.
By Emily Hohler Published
-
Britain was right to Brexit
The EU could not finalise a trade agreement with Australia. The UK could. There is a lesson in that.
By Matthew Lynn Published
-
UK millennials are worse off than previous generations
The evidence shows that millennials today are getting a raw deal. And, ultimately, that's a political choice.
By Simon Wilson Published
-
How to tackle rising inflation and falling stockmarkets
Editor's letter Inflation is rising around the world. Even though inflation is widely expected to return to around 3.5% next year, it is still wreaking havoc. Merryn Somerset-Webb explains what to do about it.
By Merryn Somerset Webb Published