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
(Image credit: Getty Images)

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.

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Markets editor

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019. 

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere. 

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful. 

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.