Inflation in the U.K. steadied at the Bank of England’s target of 2 percent in the 12 months to June 2024, strengthening hopes that the central bank will cut interest rates from 5.25 percent to 5 percent when it announces its next decision on August 1.
An interest rate cut would push mortgage lenders to also lower their rates, bringing relief to borrowers. Many lenders have already reduced rates in expectation of a cut in the near future.
The Bank of England’s interest reached a 16-year high of 5.25 percent in August 2023 from a historic low of 0.1 percent in December 2021.
Service sector inflation persists
Some analysts have raised concern about persistent inflationary pressures in the service sector, which reached around 6 percent. This could delay a rate cut until the fall. However, inflation including owner occupiers’ housing costs, rose by 2.8 percent in the 12 months to June 2024, remaining unchanged from May 2024. It showed a month-on-month increase of 0.2 percent.
Markets now expect the central bank to cut rates in August if headline inflation meets the target for the second consecutive month. However, persistently high service sector inflation and wage growth could delay a rate cut next month.
Read: U.S. retail sales rise 2.3 percent in June, May data revised up 0.3 percent
Wages grow slower
Wages in the U.K. grew at a slower pace but still increased at a pace that would normally be too strong for the Bank of England, leaving in doubt the possibility of an interest rate cut in two weeks’ time. The country’s statistics office said earnings excluding bonuses grew by an annual 5.7 percent in the three months to May. That was down from 6.0 percent in the three months to April and represented the slowest growth in core pay since the summer of 2022.
Despite the positive data signaling a rate cut soon, economists are warning that inflation could rise again later this year, which might make the Monetary Policy Committee cautious about acting prematurely.
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