INDUSTRY REACTION: Shock rise in inflation to derail rate cut hopes
Higher bills and taxes push inflation to 3.5%, putting pressure on Bank of England to put further interest rate reductions on hold.
Inflation surged to 3.5% in April, its highest level for 15 months, threatening to delay any further interest rate cuts and the boost they would have provided to the property market.
The rise, which exceeded economists’ predictions of 3.3%, was largely driven by increases in household energy bills, water costs, council tax, airfares and services inflation, which grew by 5.4%. Just as month ago inflation dipped from 2.8% to 2.6%, making the latest figure surprising.
Setback
It is a setback for both homebuyers and the wider economy, with the Bank of England now expected to take a more cautious approach to rate reductions.
The money markets have already been pricing in just one more quarter-point cut over the next 12 months, rather than the two or three before the data was released, and there is only a 50% chance of a cut in August.
Chancellor Rachel Reeves expressed disappointment at the figures, acknowledging that the “cost of living pressures are still weighing down on working people.” However, she insisted the economy was still in better shape than it was during the previous administration’s period of double-digit inflation.
Industry reacts
Jason Tebb, President of OnTheMarket, says that although affordability is a challenge: “There remains a good range of sub-4% mortgage options. However, with Swap rates edging upwards in recent weeks, these may not be around for long.”
John Phillips, CEO of Just Mortgages and Spicerhaart, added: “The big question is how will this impact the future path of interest rates. What we do know is the central bank has been clear that it expected this rise in inflation and knows full well it is likely to creep up further before eventually coming down.
“The real elephant in the room is the impact of Trump’s tariffs on global economies and international trade, which is still unknown. With plenty of uncertainty, it’s likely we could see a pause in June before returning to cuts later in the year.”
We expected a jump, but what we got was a leap – in both headline and core inflation.”
And Peter Stimson, Director of Mortgages at lender MPowered, says: “We expected a jump, but what we got was a leap – in both headline and core inflation.
“The surge in inflationary pressure won’t just translate into a slowdown in base rate cuts. We’re in ‘handbrake on’ territory.”
The cheek of Reeves, expressing disappointment at the increase in inflation, driven in large part by her own tax rises and by massive increases in water bills permitted by her own regulator.
Meanwhile, the Bank of England’s base rate is 4.25%, 75% above that of 2.4% prevailing in the eurozone. Imagine what a base rate of 2.4% would do for consumers’ morale and disposable income, and there’s no sign of eurozone racing away with such a relatively low interest rate. The economic squeeze by the B0E just goes on and on and on, and it’s doing enormous damage to the economy and the government’s fiscal position, with so much money eaten up by interest costs.