Inflation Decline Sparks Optimism for Interest Rate Cuts. Economists are forecasting a potential reduction in interest rates this September. The Bank of England, which had previously increased interest rates to combat soaring inflation, made its first rate cut since the pandemic last month, lowering rates from 5.25% to 5%. While higher interest rates can benefit savers, they often increase the cost of mortgages and other consumer loans….reports Asian Lite News
According to official figures, the UK’s inflation rate has risen for the first time this year. Overall prices increased by 2.2% in the year to July, slightly exceeding the Bank of England’s target of 2%, where it had remained since May..
NewsDarren Jones, Chief Secretary to the Treasury, acknowledged the ongoing challenges faced by households under the new Labour government. Meanwhile, Shadow Chancellor Jeremy Hunt commented on the latest figures, emphasizing the need for continued efforts to manage inflation: “Today’s figures show how important it is that the new Labour government follows the path of the previous Conservative government and focuses on keeping inflation low,” he stated. “In government, we made tough decisions to bring inflation down from 11.1% to the Bank of England’s target of 2.0%, paving the way for the first interest rate cut in four years. However, there is clearly more to be done to keep inflation down.”
Hunt also cautioned against using these statistics as a justification for tax increases, warning that planned tax hikes might be on the horizon. Despite a rise in inflation due to gas and electricity prices not falling as much as they did a year ago, the increase was less than many economists had anticipated. Although prices are rising faster now than in previous months, they remain at a slower pace compared to the peaks of 2022 and 2023, when households were significantly impacted by high energy and food costs.
The Bank of England projects inflation to rise to 2.75% in the coming months before dropping below 2% next year. Additional inflation figures, along with employment and wage data, will be released before the Bank’s next rate-setting meeting on September 19.
The prospect of a rate cut in September has been bolstered by easing inflation in services, which make up the bulk of the British economy, now at 5.2%. This follows a decrease in wage inflation, further fueling expectations of more rate cuts, although not necessarily at the upcoming Bank of England meeting.
Market speculation about a September rate cut stands at 45%, indicating a slim majority expects rates to remain at 5%. However, the likelihood of further cuts is high, with a 90% chance predicted for November and 97% for December.
The Institute for Fiscal Studies reports that food and drink prices surged by 28.4% between September 2021 and September 2023, disproportionately affecting less affluent households, as price increases were steeper for cheaper brands. However, as of July, food price inflation had stabilized at just 1.5%, according to the Office for National Statistics.
Overall, while inflationary pressures remain, there is cautious optimism that the UK will see further interest rate cuts, bringing relief to borrowers and aiding in economic recovery.