Inflation in the UK has finally fallen to the Bank of England’s 2% target, but is that enough to see interest rates fall?
The Consumer Price Index (CPI), a median measure of inflation, fell to 2% in May, its lowest point in three years; However, inflation remains robust and remained at that point in June, the most recent figure to date. Bank of England Governor Andrew Bailey has warned in the past that his Monetary Policy Committee (MPC) will only cut interest rates once it is convinced that inflation will remain under control. Therefore, even if inflation has fallen, they want to be sure that it will continue to be so. . .
The Bank has said in the past that it expects inflation to likely exceed 2% this year. But knowledge of the CPI is not the only thing the MPC uses when voting on whether to cut interest rates. It also looks at wage growth, with the theory that if wages rise too much, corporations may simply raise costs for consumers to offset the higher costs of emerging staff salaries.
Wages rose at an annual rate of 5. 7% in the three months to May, their slowest rate in just two years, but still well above CPI inflation. The Bank also takes “core inflation” into account when making a decision on interest rates. Core inflation is not accompanied by food or energy costs and was 3. 5% in June, unchanged from May.
Meanwhile, some sectors of the economy, such as the service sector, which includes businesses such as restaurants and hair salons, continue to see significant increases in value. All of this combined raises questions about how the Bank will act at the next MPC meeting on August 1.
Millions of borrowers are expecting lower interest rates, with the current base rate of 5. 25% at its highest point in 16 years. But a Reuters poll shows investors now expect there is a 35% chance that the Bank will announce a rate cut, up from just under 50% before the latest inflation data was released.
Novo Constare, CEO and co-founder of Indeed Flex, said: “A rate cut is an option next month, but may still be ill-timed as wage expansion remains strong and costs in the UK’s dominant services sector They continue to rise. Optimism that interest rates will fall this year from their highest point in 16 years, offering a much-needed boost to businesses and job creation, which would be a feather in Sir Keir Starmer’s cap.
George Sweeney (DipFA), an investment expert at private finance site Finder. com, added: “Recent inflation data, coupled with the latest wage increase figures, may not be enough for the Bank of England (BoE) to start cutting interest rates. It’s also possible that a longer timeframe is still in play and that base rate cuts will also start to come down later than markets originally expected.
Andrew Lilico, an economic researcher at the Institute of Economic Affairs, warned: “The Bank deserves to cut rates now, not wait. Monetary policy is running with a lag. If the Bank waits until the upheavals are visible, it will have waited too long. “
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