Inflation stays at 2% – when will interest rates fall?

(Image credit: Craig Hastings via Getty Images)

published 17 July 2024

The annual rate of inflation came in at 2% in June. This marks no slowdown compared to May, when the Consumer Prices Index (CPI) hit the Bank of England’s target for the first time in almost three years.

The largest upward contribution came from restaurants and hotels, according to the Office for National Statistics (ONS), where prices rose by more than a year ago.

Meanwhile, the largest downward contribution came from clothing and footwear, where prices fell this year after rising a year ago.

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An August rate cut from the Bank of England could now prove less likely. This comes after hawkish comments from the Bank of England’s chief economist earlier this month.

In a speech delivered on 10 July, Huw Pill warned about the persistence of UK inflation.

While he described inflation's return to 2% as “welcome news”, economic indicators like services inflation and wage growth remain higher than the Bank of England would like.

“Recent developments in these indicators have hinted towards some upside risk to my assessment of inflation persistence,” Pill added.

Karen Barrett, chief executive and founder of Unbiased, adds that “expectations that prices will rise again later this year” could encourage the Bank of England to tread carefully.

We look at what the latest inflation data means for you.

When will the Bank of England cut interest rates?

The Bank of England has been holding interest rates at a 16-year high of 5.25% for almost a year. The Monetary Policy Committee (MPC) will next meet on 1 August to set the base rate.

As recently as a month ago, many economists were expecting the MPC to cut the base rate at the August meeting. In a poll from Reuters, published on 12 June, 63 out of 65 economists voted for August rather than September as the most likely month for a first move.

However, expectations have shifted over the past month as experts focus on the stickiness of services inflation and wage growth. Pill’s comments on 10 July have added to this picture.

Services inflation came in at 5.7% in June, marking no change compared to May. Core inflation (which excludes volatile measures like energy, food, alcohol and tobacco) also remained the same at 3.5%.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, describes an August rate cut as resting “on a knife edge”.

He says: “While [today’s CPI] figures provide further reassurance that the UK’s inflation crisis is in the rear-view mirror, uncomfortably high services inflation suggests that its damaging after-effects are still being felt.

“Sticky services inflation will cause considerable unease at the Bank of England because it suggests that underlying price pressures are frustratingly persistent and leaves the UK more vulnerable to the impact of future price shocks.”

Despite this, he adds that CPI’s return to target in recent months “should at the very least drive a more dovish vote split to signal that rate cuts are imminent.”

Indeed, over the past few meetings, we have seen the MPC start to turn. In April’s meeting, one committee member voted for a rate cut. This increased to two committee members in May and June.

What do the latest inflation figures mean for you?

Prices are still rising, but at a far slower rate than they once were. At inflation’s peak, prices were rising by around 11% a year. Now, they are going up by 2%. This is good news for many households who have been struggling with the cost of living in recent years.

Consumers should be starting to see the effects of this when carrying out their weekly shop or paying their energy bills.

Yesterday, research company Kantar revealed that grocery prices are now rising at the slowest rate since September 2021. What’s more, the new energy price cap came into effect on 1 July, causing the average bill to tumble by 7%.

Crucially, wages are also growing at a faster rate than inflation. This means many households are starting to see the pound in their pocket go further.

Despite this, the cost-of-living crisis is far from over. Mortgage rates and rental costs remain high, causing pain for many households.

Although mortgage rates have started to come down gradually in recent weeks, they remain significantly higher than levels seen towards the end of the 2010s.

The average two-year fixed-rate mortgage now costs 5.91%, while the average five-year rate is slightly lower at 5.49%. For comparison, the same rates sat at 2.44% and 2.74% respectively in December 2019, according to data from Moneyfacts.

What’s more, consumers could see their summer budgets stretched, if they are planning to make the most of the holiday season.

“Price increases in summer spend areas such as package holidays (8.7%), holiday centres (10.9%), and cinemas, theatres and concerts (7.4%) are all in high single and even double digits,” says Matthew Chapman, associate partner at McKinsey & Company.

He adds that these are “areas where consumers seem more inclined to splurge”, and notes that “persistent services inflation is creating upward pressure on the overall rate of inflation”.

Is it time to fix your savings?

Although an August rate cut looks less likely than it once did, savers should take heed and review their savings pots sooner rather than later. Barring any major economic shocks, interest rates have now peaked. It’s not a question of if they are going to come down, but when.

Some of the best savings deals have already been pulled in anticipation of base rate cuts later this year. While the best easy-access savings accounts are still offering rates north of 5%, these are likely to tumble once the Bank of England makes its first move.

The good news is that savers can lock in higher rates for longer by putting some money in a fixed-rate account. However, it is important to remember that you won’t be able to access the money for the duration of the fixed-rate period.

As such, it’s always best to keep your emergency funds in an easy-access account while putting some longer-term savings in a one or two-year fixed-rate pot.

“This is a window of opportunity for savers, so now is the time to clamber in and grab a decent rate before it closes,” says Mark Hicks, head of active savings at Hargreaves Lansdown.

Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.

Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.

Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.

Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.