Interest rates have been kept high to squeeze the economy and slow down price rises – reducing inflation.
But today’s upward movement in inflation is unlikely to set back hopes for more base rate cuts from the Bank of England, analysts say.
In fact, the chances of a September cut have risen slightly – with market forecasts up from 36% yesterday to 45% today.
Markets still think there are two cuts to come this year, bringing the base rate down to 4.5%.
Capital Economics analysts say inflation actually rose less than expected, and that the data behind headline inflation is encouraging…
“The sharp fall in services inflation from 5.7% to a two-year low of 5.2% will reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year.”
Capital notes that core inflation and fuel inflation are also down.
“The main surprise was that the fall in restaurants and hotels inflation from 6.2% to 4.9% was bigger than the drop to 5.6% we had forecast.
“And importantly for the Bank of England, the decline in services inflation from 5.7% to 5.2% was much bigger than anyone anticipated.”
Capital believes interest rates will fall throughout next year to a landing point of 3%. Markets currently think 3.5% is a more likely destination in 2025.
