‘Bank of England will hike rates despite falling inflation’

The fall was driven by a reduction in the energy price cap and food prices but services inflation which the bank monitors rose to 7.4% from 7.2%.

Bank of England image

The Bank of England is still widely expected to hike interest rates at its next monetary policy meeting despite figures published by the Office for National Statistics revealing inflation has fallen to 6.8%.

The ONS reported falling gas and electricity prices provided the largest downward contributions to the monthly change in CPIH and CPI annual rates; food prices rose in July 2023 but by less than in July 2022, also leading to an easing in the annual inflation rates.

SERVICES INFLATION

But services inflation, which the Bank of England monitors closely to inform interest rate decisions, rose to 7.4% from 7.2%.

Tom Bill, head of UK residential research at Knight Frank, says: “Falling headline inflation suggests a faint light at the end of the tunnel but stronger than expected wage growth and core inflation indicates the Bank of England will believe its work raising rates isn’t quite done yet.

tom bill knight frank
Tom Bill, Knight Frank

“Some lenders are cutting rates, but for anyone buying, selling or re-mortgaging, it shows the upwards pressure on mortgage rates hasn’t gone away.”

But he adds: “That said, demand in the property market will continue to be supported by wage growth which is now outpacing inflation.

“We don’t expect a cliff-edge moment for prices but they will continue to come under pressure in the short term along with transaction volumes.

“The normalisation of rates was not unexpected but the journey has been bumpy. The previous government went too far, too fast for financial markets and the Bank of England has been accused of doing too little, too late.”

STEP BACK

Paresh Raja, Chief Executive of Market Financial Solutions, warns: “It might be a case of two steps forward, one step back. All the talk this week has been that we are in for a shock rise in inflation when next month’s data comes out on 20 September.

“Given the Bank of England’s next interest rate decision follows the next day (21 September) that will likely prove a hugely important 48 hours.”

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Ben Thompson, Mortgage Advice Bureau

Ben Thompson, Deputy Chief Executive at Mortgage Advice Bureau, says: “Inflation dropping back opens the door for the Bank of England to press pause on rate rises, but record wage growth keeps potential hikes firmly on the table.”

And Lewis Shaw, owner and mortgage expert at Shaw Financail Services, adds: “Expect more base rate rises starting with 50 basis points in September and more hikes until this inflationary tiger has been captured and put back in its cage.”

Inflation rates chart


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