Interest rates: Less likely to see a significant rise following an inflation surprise

Berita, Bisnis208 Dilihat

Following a surprise drop in inflation in June, the prediction for interest rates indicates a less steep rise.

Since December 2021, the Bank of England has increased rates 13 times in an attempt to curb surging price inflation, resulting in higher borrowing costs for millions.

With inflation easing to 7.9% in June, down from 8.7% the previous month, experts suggest that the Bank of England is facing less pressure to take immediate action.

Consequently, UK inflation has reached its lowest level in over a year.

The slowdown in June can be attributed to falling fuel prices, while the Office for National Statistics (ONS), which publishes the figures, indicates that food prices are rising at a slower pace.

Nevertheless, the UK’s inflation rate remains nearly four times higher than the Bank’s official 2% target and significantly exceeds that of other developed countries.

In the US, inflation stands at 3%, while in the eurozone, it is 5.5%.

“It is a considerable decline [in the UK], but we must remember that last month, there was no change at all in headline inflation.

So, in a way, what we are witnessing this morning is catching up with the declines experienced in other comparable countries,” explained Grant Fitzner, the ONS chief economist, during the BBC’s Today Programme.

“It appears that we might still have the highest inflation rate among the G7 [group of developed nations], so there is still some ground to cover,” the statement reads.

Since last year, prices of food, energy, and services have surged, putting pressure on household incomes.

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In an effort to address this issue, the Bank has raised interest rates from near zero to their current level of 5%.

The aim is to curtail consumer spending by increasing borrowing costs, which, in turn, would help cool down price rises.

The surge in interest rates has led to mortgage borrowing costs reaching their highest level in 15 years, resulting in millions of homeowners confronting higher monthly repayments.

On Wednesday, the average two-year fixed residential mortgage rate inched up to 6.81%, while the five-year rate reached 6.33%.

This is in stark contrast to rates from the same time last year, which were closer to 3%.

Economists are revising their expectations for immediate interest rate hikes as inflation declined more than anticipated.

Despite this surprise, they remain confident that there will be further rate increases in the future.

On August 3, at its upcoming decision, the Bank is now highly anticipated to increase rates to 5.25%, up from the current rate of 5%.

Analysts at Capital Economics predict that beyond that point, rates will rise slightly higher, reaching a peak of 5.5% due to the persistence of certain inflation pressures.

However, they assert that without June’s drop in inflation, the peak would have more likely surpassed 6%.

Source : bbc.com

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