Will the Bank of England hold off on increasing rates?
The annual inflation rate in the UK dipped slightly to 6.7% in August after a 6.8% reading in July, extending the streak of consecutive fall in consumer price inflation (CPI) to three months and surprising experts who forecasted an increase to 7%.
“The rate of inflation eased slightly this month driven by falls in the often-erratic cost of overnight accommodation and air fares, as well as food prices rising by less than the same time last year,” Grant Fitzner, chief economist at the Office for National Statistics (ONS), said.
“This was partially offset by an increase in the price of petrol and diesel compared with a steep decline at this time last year, following record prices seen in July 2022.”
Annual inflation slowed slightly in August 2023:
— Office for National Statistics (ONS) (@ONS) September 20, 2023
▪️ Consumer Prices Index including owner occupiers’ housing costs rose by 6.3% in the 12 months to August, down from 6.4% in July
▪️ Consumer Prices Index (CPI) rose by 6.7%, down from 6.8% in July
➡️ https://t.co/Ve9iV25p0e pic.twitter.com/TCZp8gJ0yV
Despite the latest fall in the inflation rate, there is still a long way to go to reach the government’s 2% target. The UK also remains on course to have the highest inflation among major economies this year, according to the Organisation for Economic Co-operation and Development, with UK inflation forecasted to average 7.2% in 2023.
Adam Oldfield, chief revenue officer at Phoebus Software, commented that while the fall in inflation rate was small, it was at least in the right direction, especially given the global rate of inflation.
“This, along with the hint from the governor that the Bank of England may not have to increase interest rates this month while inflation is falling, could be the news many have been hoping for,” he said. “Tomorrow’s MPC decision will be one we wait for with bated breath.
“However, mortgage rates have already been coming down but the dilemma regarding fixed rates is still one that is not easily answered. For a huge number of borrowers, the amount they are now paying for their mortgage is the highest it has been and managing monthly payments is no doubt a worry. This is reflected in the increase in arrears, which is a problem that lenders will have to manage carefully.”
Ben Thompson, deputy chief executive at the Mortgage Advice Bureau, believes the most recent fall in inflation “will fill the nation’s mortgage holders with hope that the tide has well and truly turned.”
“Significant month-on-month falls ramp up the likelihood that the Bank of England will hold off on increasing rates right now,” he said. “This will likely be a breath of fresh air for those on variable rates or trackers, especially if this means that interest rates are near, or at, their peak.
“There is better news for those looking to remortgage and, indeed, prospective buyers. This is due to the steady decline of swap rates, meaning many lenders have reduced rates on various deals. Although swap rates remain high in comparison to the past decade, they are some of the lowest rates we’ve seen in the past year.”
Charlie Huggins, manager of quality shares portfolio at Wealth Club, agreed that moderating inflation is good news for homeowners and first-time buyers.
“With these latest inflation figures, the prospect of further cuts to the cost of borrowing in the coming weeks has increased,” he said.
Huggins, however, pointed out that “we are not yet out of the woods”, with wages rising rapidly, sterling remaining weak, and oil prices still going up.
“All of these things have potential to cause further inflationary headaches for the Bank of England,” he continued. “For now, though, the trend is in the right direction. While price rises are still much higher than anyone would like, there is no longer a sense that inflation is out of control.”
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