18 July 2023

Fears grow over more interest rate rises ahead of inflation data

18 July 2023

Prospects for further big interest rate rises will be in sharp focus again on Wednesday when the latest official inflation figures are released amid worries over more financial pain in store for homeowners.

Most economists expect the Office for National Statistics (ONS) to reveal that inflation eased back to 8.2% in June from 8.7% in May, but price rises are not slowing as quickly as hoped.

Prime Minister Rishi Sunak said earlier this week that inflation is not coming down as quickly as he would like, casting further doubts over the Government’s pledge to halve inflation by the end of the year.

He has made halving consumer prices index (CPI) inflation to around 5.3% by the end of 2023 of his key priorities, but admitted it is “taking longer than any of us would like” to bring it down.

Experts believe the Bank of England will need to take further action on rates when it meets next month, with inflation proving far more stubborn than forecast, which will add further financial pressures to homeowners already facing steep rises in mortgage rates on top of the ongoing wider cost of crisis.

Food price inflation is set to slow but still remained painfully high at around 17.7% in June, against 18.3% in May, according to Pantheon Macroeconomics.

Bank of England policymakers will also be watching the so-called core inflation data carefully ahead of their August 3 meeting.

The figure – which excludes the price of energy, food, alcohol and tobacco – is often more in focus for the Bank’s Monetary Policy Committee (MPC) members when they set interest rates.

Investec Economics is predicting CPI inflation to ease back to 8.1% in June, but for core CPI to hold firm at 7.1%, having shot up in May from 6.8% in April, increasing the likelihood of another rate rise.

As concerns primarily centre on the sticky nature of core inflation, merely seeing lower headline inflation would not deter additional tightening

Sandra Horsfield, at Investec, is predicting another half-a-percentage point rate increase from 5% currently to 5.5% in August – which would be the second 50 basis point rise in a row.

She said: “As concerns primarily centre on the sticky nature of core inflation, merely seeing lower headline inflation would not deter additional tightening.

“We expect another 50 basis point rate rise at the August meeting. Indeed, we doubt the MPC will be confident enough to pause raising rates in September either.”

As well as stubborn inflation, recent official figures have also shown that wage growth has reached record levels.

Average regular pay, not including bonuses, was 7.3% higher in the three months to May compared with the same period last year – the joint highest since records began in 2001.

Financial markets are now pricing in rates rising to 6.25% by next March, which would mean more mortgage borrowers seeing painful rises in their monthly repayments as millions come off fixed-rate deals.

But Pantheon experts believe that if inflation eases by more than expected to 8.1%, as it predicts, then the Bank could take its foot off the pedal with a smaller 25 basis point rise.

Samuel Tombs said: “Investors likely will reassess their view that the MPC is much more likely to increase Bank rate by 50bp, instead of 25bp, at next month’s meeting after June’s consumer prices report is released on Wednesday.”

He said that, while still above the Bank’s CPI forecast in May, a fall in inflation to 8.1% would see a much smaller overshoot than in May.

“What’s more, we see a greater risk of an 8% (CPI inflation) print than an upside surprise to our forecast,” he added.

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