City experts have poured cold water on hopes the Bank of England will cut the base interest rate tomorrow following disappointing news on inflation.
The headline rate of inflation was unchanged at 2.2 percent in August, however core inflation – stripping out energy, food, alcohol and tobacco – ticked upwards from 3.3 percent to 3.6 percent.
Analysts blamed the fact that the headline rate of inflation failed to show a fall on a series of massive increases in air fares in August, so hitting parents in the pocket as the schools broke up for the summer holidays.
Air fares rose by a staggering 22.2 percent in the month, which was the second highest increase on record, putting them 11.9 percent higher than August last year.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said the inflation figures suggest the Bank of England is now likely to hold off any new cut in the base rate, currently set at 5 percent, until November at the earliest.
She said: “Although headline inflation in the UK remains unchanged, a creeping up in core and services inflation will cause niggles of concern.
“Costs in restaurants and hotels have fallen back, but transport prices have shot up, particularly air fares. It seems that consumers are still ring-fencing available budgets for holidays and are willing to shell out for higher ticket prices amid a bunfight for seats.
“Airfares jumped 11.9 percent in the year to August. It means airfares rose by 22.2 percent on the month, the second biggest rise since records began in 2001.”
As a result, she said the financial markets are now looking for the Bank of England’s Monetary Policy Committee (MPC) to hold a cut in the base rate until November with another to come in December.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said the figures could be bad news for home buyers hoping for further reductions in home loan interest rates.
“Mortgage borrowers on tracker rates are highly likely to have to wait a while longer for the next cut in their monthly payments, and while there are still cuts priced in for 2024, they may well be wondering whether higher core inflation risks throwing more cuts into question in the coming months,” she said.
Peter Stimson, Head of Product at MPowered Mortgages, said: “With headline inflation remaining unchanged from July, a base rate cut tomorrow now seems unlikely.”Although a September rate cut looks unlikely, there’s still a strong possibility of further rate cuts before year-end, which markets have been pricing in.”
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment platform, said: “A stable headline inflation figure is comforting for households who may now be enjoying more financial breathing space as incomes stretch further than they did a year ago. It’s important to remember, however, that prices are still very much on the rise, they are just increasing at a significantly slower pace than at the height of the cost-of-living crisis.
“What may be worrying, however, is that core inflation, which strips out the more volatile items such as food, alcohol and tobacco, rose by 3.6 percent in the 12 months to August, up from 3.3 percent in July, signalling that some of the stickier inflationary pressures may still be lingering.
“Add in a slight uptick in services inflation to 5.6% from 5.2% in July – though comfortingly food inflation edged lower to 1.3% – and the Bank of England has some thinking to do ahead of its interest rate decision tomorrow.”
She added: “While inflation is stable for now – remaining just above the BoE’s target of 2 percent – it is expected to tick upwards in the final months of the year when a 10 percent increase in the Ofgem Energy Price Cap on the previous quarter kicks in on October 1.”
David Belle, Founder and Trader at Fink Money, said there is now “no chance” that the Bank of England will cut the base rate this week.
Gabriel McKeown, Head of Macroeconomics at Sad Rabbit Investments, told Newspage: “While headline inflation appears tamed, the inflation genie isn’t fully back in the bottle, as the uptick in core and services measures could give the Bank of England pause for thought.
Riz Malik, Independent Financial Adviser at R3 Wealth, said: “Today’s numbers don’t make a strong enough argument as far as the Bank of England is concerned to cut rates tomorrow, given their track record. That’s not to say that we won’t have further rate cuts before the end of this year continuing into next.”
