The main measure of inflation is bang on the Bank of England’s official target for the second consecutive month according to official data out this morning, keeping the way open for a rate cut this summer.
The year-on-year reading of consumer price index (CPI) for June stayed at 2% according to the Office for National Statistics. That was slightly higher than 1.9% forecast, but it left it at its lowest in nearly three years.
Members of the Monetary Policy Committee are expected to cut the benchmark cost of borrowing from its 16-year high of 5.25% this summer, in a move that will make mortgages and loans more affordable for millions of borrowers. It would be the first such cut since the pandemic-era’s emergency support measures for the economy.
Rates were hiked for 14 consecutive meetings to the peak to tackle double-digit inflation stoked by high energy prices after Russia’s invasion of Ukraine. Inflation peaked at over 11% in October 2022, at its highest level in four decades.
The second month of on-target CPI will add to hopes that runaway price rises have been tamed, allowing the MPC to cut rates.
But City experts pointed to sticky-looking inflation within the dominant services sector of the UK economy, which held steady at 5.7%.
Sanjay Raja, chief UK economist at Deutsche Bank, said the numbers “won’t be what the doctor ordered”, adding:
“Markets have pared back expectations of an August rate cut from near 50% to 25%”, with services CPI “The fly in the ointment”.
Looking at the detai in the main figuresl, ONS chief executive Grant Fitzner said: “Hotel prices rose strongly, while second-hand car costs fell but by less than this time last year.”
The City is on watch for a summer rate cut, although the chances of action in August looked to be receding. .
But September is seen by many experts as more likely.
Kyle Chapman, FX Markets Analyst at Ballinger Group, said:
“I don't think this was enough to tip the balance towards a rate cut in August. Inflation at the 2% target is not enough to prompt a rate cut, because it is being driven by transitory factors. The services component had to start trending in the right direction, and there's no solid evidence yet that this is happening in a sustainable manner. 5.7% is simply too high.”
Nonetheless, fresh calls for action from the BOE to ease the pressure on households and boost the moribund housing market followed today’s data.
Jack Tutton, a director at SJ Mortgages, an independent broker said: “Inflation has hit the target for two consecutive months now so it is time to relieve pressure on mortgage holders. We have seen mortgage rates coming down in the past few weeks but they are still higher than they were at the start of the year,” adding:.
“ The Bank of England could breath much needed positivity into the markets by cutting the base rate on 1 August.”
Deutsche’s Raja pointed out that live music prices were up 7.5% month-on-month. “While difficult to fully untangle, it’s certainly very possible that some Taylor Swift effects were at play here – and could very well reverse out next month,” he said.
