UK inflation fell to its lowest level in almost three years last month - but millions of mortgage borrowers will be wondering when this will finally lead to an interest rate cut.
The Consumer Price Index (CPI) measure of inflation fell to 2.3% in the year to April, the Office for National Statistics (ONS) said today. This is down from 3.2% compared to the previous month. It means prices in the shops are still rising - they’re just not going up as quickly as before.
Inflation reached a peak of 11.1% in October 2022, so it has come down a lot since then - but it still remains above the Bank of England target of 2% inflation. CPI first started rising in 2021, leading the Bank of England to put up its base rate for the first time in December 2021.
The base rate was at an historic low of 0.1% before this first Bank of England increase. It now sits at 5.25% and has been at this level since August 2023. The Bank of England has kept the base rate paused for its past five Monetary Policy Committee (MPC) meetings. The theory behind raising interest rates is that it makes borrowing more expensive, so people will then spend less.
This should drive down demand and prices, which will lower inflation. But when will interest rates finally be cut? Bank of England Governor Andrew Bailey previously said the base rate won't be cut until the MPC is sure inflation will remain under control - so even though inflation is close to the 2% target, the Bank of England needs to be sure it will stay down.
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The Bank of England will need meet to discuss its base rate on June 20. However, financial analysts are less convinced that a rate cut will be announced on this day, as inflation did not fall by as much as some had expected. Some economists had predicted CPI would fall to 2.1% in April.
Due to this, markets are now expecting an August rate cut is more likely. Martin Lewis MoneySavingExpert.com founder said the April rate of inflation was at the "high end of expectations" and the Bank of England 2% target had not been hit. He added: "It means an interest rate cut in June is less likely, August more likely."
Luke Bartholomew, senior economist at abrdn, said: "There is another inflation and labour market report between now and the Bank’s June meeting which taken together could change the debate again, and certainly the market is likely to remain volatile in it assessment of the likely path of policy. But for now, the case for August over June for the timing of the first cut is looking stronger today.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “It looks increasingly likely that a rate cut may still not come until August. Even so, it’s more stable ground for investors in the UK. As inflation falls back, they are enjoying the double benefit of recovering capital values and dividend yields above the rate of rising prices, with a typical UK All Share tracker yielding 3.5%.’’
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, added: “The possibility of a summer cut is being floated by members of the rate-setting Monetary Policy Committee, whether it happens in June or August remains to be seen.”
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