20 August 2025: Food Prices Up 4.9% To Highest Level Since February
Prices rose 3.8% in the year to July, up from 3.6% the previous month, stoking fears that interest rates will remain higher for longer as the Bank of England continues to battle stubborn inflation, writes Kevin Pratt.
The Bank cut its influential Bank Rate from 4.25% to 4% earlier this month, and there has been speculation that further cuts might follow before the end of the year. But the Bank will keep the rate high until it is confident that inflation is under control.
Today’s figure is higher than the 3.7% forecast by the Bank, although it expects the rate to peak at 4% before dropping back later this year and in 2026.
Policymakers may take some solace from the fact that a freakish leap in the cost of air travel played a significant part in bumping up the inflation figure, released today by the Office for National Statistics (ONS).
Airfares rose by 30.2% between June and July 2025, up from 13.3% in the same months in 2024 and the largest July increase since collection of airfares changed from quarterly to monthly in 2001.
The ONS says this is likely due to the timing of school summer holidays, as returning European flights in July 2024 were during the school term, when they cost less, whereas they were during the school holidays in 2025, which will have made them more expensive.
Motor fuel prices also jumped last month, with petrol up 2p per litre and diesel up 2.9p per litre.
Worryingly for household budgets, the 12-month rate for food and non-alcoholic beverages was 4.9%, up from 4.5% in the 12 months to June. This was the fourth consecutive increase in the annual rate and the highest recorded since February 2024.
Nicholas Hyatt at Wealth Club said the food price inflation figure is alarming: “That will be very painful for consumers. Rising food and beverage prices together with rising housing costs will be decimating disposable incomes.
“This leaves policymakers with a bit of a conundrum. The most recent interest rate cut was made despite the expectation that inflation would hit 4% in September, which now looks increasingly likely. But with the labour market slowing, the risk of stagflation [when inflation is accompanied by a lack of economic growth] is very real.
“If the UK is heading towards the economic worst of all worlds, it’s not clear what the central bank or the government should do about it.”
The next Bank of England interest rate decision is on 12 September. In addition to domestic issues, it will need to consider events on the international stage, including the fallout from trade tariff disputes, poor harvests due to extreme weather, and continued geopolitical tensions in various parts of the globe.
The next interest rate announcement is due on 18 September 2025.
7 August 2025: Bank Of England Cuts Despite Stubborn Inflation
Mortgage-holders with variable rate deals will see their payments fall from next month following today’s Bank of England’s decision to cut its benchmark interest rate from 4.25% to 4.0%, the fifth quarter-point reduction since this time last year, writes Kevin Pratt.
An estimated 1.5 million homeowners coming to the end of fixed-rate mortgage deals by the end of next year will also welcome the move, which is likely to keep typical remortgage rates on a downwards trajectory.
The news is less positive for savers, however, who are likely to see falls in the rates of return available on many accounts (you can see what is available on our high interest savings accounts page).
The Bank’s nine-strong Monetary Policy Committee, which meets 10 times a year to set the Bank Rate, recorded a split decision, with five backing the reduction to 4.0% (one member pushed for a cut to 3.75%) and four wanting to hold it at 4.25%.
The Bank Rate is the Bank’s main weapon in the fight against rising prices. Its inflation target is 2%, but the latest figures show prices rising by 3.6% in June, with food price inflation running at a worrying 4.5%.
The theory is that a high cost of borrowing will reduce demand across the economy and exert downward pressure on prices. But it is a delicate balancing act, since high interest rates can lead to lower wages, job losses and a general slowdown in economic activity.
Analysts confidently predicted today’s cut, saying the Bank is more concerned about the future path of inflation rather than historic figures. Laith Khalaf at AJ Bell said: “It might seem odd for the Bank to be cutting interest rates at the same time that inflation is pulling away from the 2% target – the 3.6% reading was up from 2.6% in March.
“However, the Bank’s actions are based not on the current inflation rate, which tells us about price rises over the last 12 months, but rather on future inflation, forecast over the next three years.
“Importantly, the Bank of England’s previous forecasts show inflation rising over the course of this year before falling back, so prices are currently evolving broadly in line with what the Bank has been expecting.”
The Bank said today that inflation will peak at 4.0% in September before falling back towards its target.
Future Bank rate policy will also reflect events in the global economy, such as the impact of US trade tariffs and any deterioration in international relations, particularly between the US and Russia and the US and China.
Matt Smith at property portal Rightmove said: “Mortgage lenders have had a bit of room to reduce rates over the last week, owing to the ongoing developments around global tariffs. However, we expect lenders will use today’s cut as the catalyst to reduce their rates a little further, though lender competition remains fierce and we don’t expect major rate drops.
“Lenders have been competing for business in a market that has the largest supply of homes for sale in a decade. A combination of rate cuts and changes to buyer affordability criteria is helping many home-movers to responsibly borrow more towards the home they want.
“The market expects there will be one more Bank Rate cut before the end of the year, with an outside chance of two. Any further cuts would likely see this cycle repeat again, with lenders using it as an opportunity to reduce rates a little more. It bodes well for the second half of this year, with further mortgage rate reductions and stable prices likely to encourage more activity.”
The next interest rate announcement is due on 18 September 2025.
16 July 2025: Rise From 3.4% Reflects Food, Transport Costs
The prospect of an early interest rate cut by the Bank of England receded this morning with the latest inflation figures from the Office for National Statistics, which show that prices rose by 3.6% in the 12 months to June, writes Kevin Pratt.
The higher-than-expected increase, from 3.4% in May, was attributed to rising food prices and high transport and travel costs.
The next Bank Rate decision is due on 7 August. The Bank uses high interest rates to make borrowing more expensive and sap demand from the economy, which helps ease inflationary pressures. But with prices maintaining their upwards trajectory, forecasters expect the Bank Rate to remain at 4.25% until the autumn at the earliest.
The Bank says it expects inflation to peak at 3.7% before falling back towards its target of 2%, which is set by the government. But factors beyond the Bank’s control, such as the effect on global trade by increased tariffs and the government’s wider economic strategy, including possible tax increases in the autumn Budget, add uncertainty to any predictions.
Matt Smith at property portal Rightmove said the prospects for the housing market – where borrowing costs are heavily influenced by the Bank Rate – remain positive: “A slightly higher-than-expected inflation figure this morning, but we’re still on track for inflation to peak this summer before falling back as the Bank expects.
“The average two-year mortgage rate is now 4.53%, a significant drop from 5.34% last year, with hopefully two more Bank Rate cuts still to come [in 2025], which could help to drive rates down further.”
David Morrison at investment platform Trade Nation said: “Inflation shows no sign of turning lower and is stuck well above the Bank of England’s 2% target. These numbers are a problem for the Bank as they make it much harder for them to cut rates, even though the UK’s economic growth is virtually non-existent.”
The value of sterling rose in the wake of the ONS announcement, indicating that traders expect a ‘hold’ by the Bank next month.
Isaac Stell at Wealth Club said: “The surprising strength of the inflation figures adds additional issues to the UK’s mounting economic woes. All eyes will turn to the Bank of England, which has indicated it is willing to cut rates given the cooling jobs market but is unlikely to be able to justify a cut when inflation has started to run hot once again.
“In the absence of interest rate cuts, consumers are likely to feel a continued squeeze, unhelpful for the government’s growth agenda, which has yet to show signs of life. Awful April has rolled into Miserable May and in turn rolled into Joyless June. The government will now pin its hopes on a Jubilant July.”
19 June 2025: Inflationary Pressures Put Bank Rate Cuts on Ice
Mortgage borrowers and savers will see little or no change to their respective interest rates following today’s decision by the Bank of England to leave its influential Bank Rate unchanged at 4.25%, writes Kevin Pratt.
The rate was cut from 4.50% last month, but yesterday’s news that inflation only fell by a whisker in the year to May (to 3.4%), coupled with global economic uncertainty triggered by conflict in the Middle East, has prompted the Bank’s Monetary Policy Committee (MPC) to adopt a cautious approach to loosening its policy on borrowing costs.
Six members of the nine-strong MPC voted to keep the rate at 4.25% while three wanted to see it fall to 4.0%. A higher bank rate is designed to lower inflation by weakening spending power and reducing demand. The Bank’s inflation target is 2%.
The Federal Reserve, the United States equivalent of the Bank, yesterday held its rates in the range 4.25% to 4.50%, stating that it expects President Trump’s trade tariffs policy to push inflation from 2.4% to 3% later this year.
With regards to UK prices, the Bank said: “Consumer price inflation is expected to remain broadly at current rates throughout the remainder of the year before falling back towards target next year.
“Furthermore, global uncertainty remains elevated. Energy prices have risen owing to an escalation of the conflict in the Middle East. The Committee will remain sensitive to heightened unpredictability in the economic and geopolitical environment, and will continue to update its assessment of risks to the economy.”
Market-watchers are still hopeful that the Bank Rate will fall to 4.0% or even 3.75% by the end of 2025.
Following today’s Bank Rate freeze, Harriet Guevara at Nottingham Building Society said: “As far as mortgages are concerned, while we haven’t seen any Bank Rate movement this month, future cuts could bring opportunities for borrowers, especially for those coming off fixed deals, to explore more affordable options.
“In the meantime, it’s important to stay informed, review your products regularly, and be ready to act when the time is right.
“This is also an important moment for savers to review their options. Cash ISAs remain a powerful tool, especially with rates still relatively strong on both easy access and fixed-rate options. And with speculation that future rule changes may reduce how much of your £20,000 annual ISA allowance can be held in cash, it makes sense to take advantage of the current structure while you still can.”
“Reviewing your accounts now could help maximise returns before rates start to fall, and before any potential restrictions on tax-free cash saving are introduced.”
The next Bank Rate announcement is due on 7 August 2025.
18 June 2025: Economists Fear Price Rises If Oil Supplies Hit
Hopes for a cut in the Bank of England’s benchmark Bank Rate as early as tomorrow faded with the news that inflation in the year to May was 3.4%, down only slightly from the 3.5% reported by the Office for National Statistics for April, writes Kevin Pratt.
The Bank uses a relatively high Bank Rate to sap demand from the economy and thus lower the rate of price increases towards its target of 2%. It will announce its latest borrowing rate, which influences mortgage and savings rates, at noon on Thursday.
The Bank Rate currently stands at 4.25%, having come down from 4.5% in May. The Bank expects inflation to remain at or above current levels until the autumn, although its calculations have been thrown into question by conflict in the Middle East.
Around a fifth of global gas and oil supplies are shipped through the Strait of Hormuz off the coast of Iran at the mouth of the Persian/Arabian Gulf. If the Iran-Israel war continues and ships come under threat, oil prices will rise, feeding inflationary pressure into economies worldwide.
The price of oil has risen from around $63 a barrel at the end of May to over $76 today, and it could rise further if the United States enters the fray on the side of Israel.
Domestically, some prices have risen as employers adjust to paying higher National Insurance Contributions, introduced in April along with a higher rate of minimum wages. The ONS said a fall in transport costs was partially offset by an increase in the cost of food, furniture and household goods.
It also said its April inflation figures were overstated due to an error in vehicle excise duty data provided by the government, and should have stood at 3.4% rather than 3.5%. The error has been corrected but, in line with established practice, the rate itself has not been amended.
Commenting on today’s figures, Nicholas Hyatt at Wealth Club said: “The price of Brent crude [oil] has moved sharply higher despite key global oil routes remaining largely unaffected, and the conflict has the potential to disrupt global energy flows much more severely than it has so far.
“As a key input into pretty much everything, a spike in oil would drive up prices across the board. The inflationary risk from the Middle East, combined with already rising prices, could change the calculus for the Bank of England and make rate cuts that bit less likely.”
Matt Smith at property portal Rightmove said: “As the rate of inflation stays above 3%, the expectation is that the Bank of England is set to act cautiously. Anticipation had risen that we may be in line for multiple Base Rate cuts this year at the peak of tariff uncertainty, but as some of these pressures have eased, this expectation has fallen back.
“Forecasts for the rest of the year are likely to jump around a bit due to ongoing global uncertainty and changes in how the market expects things to pan out. However, the current view is that we’re only expecting one more Base Rate cut this year, and tomorrow’s decision by the Bank of England is likely to be a hold.
“As for average mortgage rates, these have stayed pretty flat for the last few weeks as the opportunity for lenders to lower rates has reduced. Despite this, we’re seeing an active housing market at the moment, with May having been the strongest full month for agreed property sales since March 2022.”
21 May 2025: Bank Rate May Stay Higher For Longer
Prices rose by 3.5% in the year to ‘awful April’, spurred by a clutch of increases to energy and water bills, vehicle excise duty and council tax payments, writes Kevin Pratt.
In March, annual inflation fell from 2.8% to 2.6% on the back of lower prices at the fuel pumps. This latest increase takes the annual rate to its highest since February 2024.
The Bank of England, which has an inflation target of 2%, forecast that the rate would peak at 3.5% in the third quarter of 2025 when it cut the benchmark Bank Rate to 4.25% earlier this month. The spike in April likely reflects businesses increasing prices on the back of higher employment costs, which also took effect at the beginning of the month.
Yesterday analysts predicted that the cap which governs the majority of domestic energy bills will fall by 7% when it is next revised in July, not 9% as previously indicated. There are also concerns about the potential impact of higher trade tariffs on prices.
Further cuts to the Bank Rate may be delayed while the Bank monitors inflationary pressures across the economy. Commentators had expected further cuts to as low as 3.75% by the end of the year but the trajectory taken by inflation during the summer will determine whether and when these will materialise.
Nicholas Hyett at investment advisor Wealth Club said: “The UK’s disinflation story has gone down the drain this morning. Higher water and energy prices were always expected to push up inflation in April. In the event, prices have risen even faster than expected, with the price of household services rising a whopping 7% year-on-year, with water and sewerage costs alone up 26.1% month-on-month.
“The spike could cause a bit of a stink at the Bank of England, which cut interest rates just a couple of weeks ago. Two members of its Monetary Policy Committee wanted to leave rates unchanged, and they may well feel vindicated by today’s number.
“The net effect of all this is a greater squeeze on the consumer, together with the probability of fewer interest rate cuts in the near term.”
The Bank uses higher interest rates to increase the cost of borrowing and sap demand, exerting downward pressure on prices. If the Bank Rate stays higher for longer, it may lead to more expensive mortgages on the one hand, but greater stability in savings rates on the other.
8 May 2025: Reduction Despite Likely Rise In Inflation To 3.5%
The Bank of England has trimmed its base lending rate from 4.5% to 4.25% in a bid to counteract a potential slowdown as the global economy adjusts to US President Trump’s imposition of swingeing trade tariffs, writes Kevin Pratt.
The news follows today’s announcement of a trade deal between the UK and the US that will limit some of the tariffs levied between the two countries. Other deals between the US and its trading partners are expected to follow.
A lower Bank Rate will be welcomed by mortgage borrowers as it is likely to influence lending rates across the economy. But savers may see their returns fall unless they have locked into a fixed rate.
The Bank uses interest rates to help control inflation, which was recorded at 2.6% in March. The figure for April will be released later this month but is expected to increase to around 3% because of a clutch of price increases including energy and water bills and Council Tax payments.
But the Bank says there is justification for today’s cut, despite the likelihood that inflation will rise further this year. Its May Monetary Policy Report said: “The progress we have made on inflation means we have been able to reduce interest rates gradually since last year. Nevertheless, inflation is likely to rise to 3.5% by September. Inflation is expected to fall back to the 2% target after that.
“If things evolve as expected, we expect to reduce interest rates further. But there are risks around the path of inflation. We need to be confident that inflation will remain low and stable in a lasting way. We will decide carefully by how much and when we can cut interest rates.”
Today’s decision by the Bank’s nine-strong Monetary Policy Committee was a close call at 5 votes to 4 in favour of the cut to 4.25%. Two members wanted a cut to 4.0% while two wanted to leave the rate at 4.5%.
Economic forecasters suggest the Bank would like to reduce the base rate to 3.75% by the end of the year if conditions allow.
Yesterday, the Federal Reserve, the Bank of England’s US equivalent, held its main lending rates within the range 4.25% – 4.50% for the third time in succession.
Both central banks have an inflation target of 2%, with higher interest rates deployed in a bid to slow economic activity and reduce the speed at which prices are rising.
Matt Smith at property portal Rightmove said: “With some mortgage lenders having taken their time to pass on the benefits of this expected Bank Rate cut, I think we may see further reductions in the coming days and weeks.
“The lowest available five-year and two-year fixed mortgage rates are edging downwards, with the cheapest available two-year fixed rate the lowest it’s been since before the mini-Budget in March. Since the last rate cut, we’ve also seen how lenders are trying to help home-buyers outside of reducing rates, by reviewing their affordability criteria.
“There’s still a lot of uncertainty over how tariffs may impact the global economy, so it’s difficult to make predictions. However, financial markets are forecasting two to three more Bank Rate cuts in 2025. In the short-term, I think movers can expect average mortgage rates to trickle downwards over the next few weeks, but not dramatically.”
The Bank of England will announce its next Bank Rate decision on 19 June.
16 April 2025: Global Turmoil Takes Edge Off Optimistic Forecasts
Expectations of a Bank of England interest rate cut in May blossomed on the news that inflation fell to 2.6% in the year to March, writes Kevin Pratt.
The annual rate at which prices are rising continued to slow from 2.8% in February and 3% in January. Analysts believe this will encourage the Bank to trim the benchmark Bank Rate from 4.5% to 4.25% at its next policy meeting on 8 May.
Mortgage rates have tumbled in recent days, with lenders anticipating as many as four Bank Rate reductions in 2025, which could take it down to 3.5%. The Bank of England is thought likely to cut the rate to stimulate economic activity in the face of a global slowdown triggered by increased trade tariffs.
Nathan Emerson at estate agent trade body Propertymark said: “Worries about the UK and the global economy in response to wider international events has provided a generally downbeat outlook for many consumers. However, today’s news will hopefully provide welcome relief to people considering taking advantage of the traditionally busy spring and summer months to purchase their next home.”
While this is positive news for the housing market, it is also likely that returns on savings will be hit, with the best rates falling below current levels of around 4.5%.
Today’s inflation rate figure was attributed by the Office for National Statistics to falls in the wholesale cost of oil, which have been reflected in cheaper pump prices. Supermarkets are selling a litre of petrol for below £1.32, down from a recent high of £1.40 in February.
Despite the positive inflation reading, commentators sounded notes of caution, especially given the repeated lurches in stock market prices since President Trump’s so-called Liberation Day on 2 April, when he introduced a raft of swingeing tariff increases.
Policy adjustments in the days since and continued fears about the possibility of a full-on trade war between the US and China are introducing an element of uncertainty to forecasts.
Jonathan Moyes at Wealth Club said: “The UK economy is not out of the woods yet. There is a long and swinging road to reach the Bank’s 2% inflation target. Services inflation remains stubbornly high, largely due to higher housing costs, including higher rents and council tax. The rise in the energy price cap is also set to see inflation jump in April.
“Whisper it quietly though, were it not for a global trade war, the UK consumer would be in excellent shape. Wage growth is running at 5.6%, a further three interest rate cuts this year will drive mortgage rates lower, food inflation is slowing, as is eating out and travel. Plus with the oil price in the low $60-a-barrel range, energy prices look to have peaked.
“If the UK can escape the worst of the global trade war, it might not all be doom and gloom for the UK consumer this year, and we haven’t said that for a while.”
Danni Hewson at broker AJ Bell said: “This month’s figures almost seem redundant considering all those price rises that set in at the start of April, which are expected to push inflation higher than any of us would like. From water bills to energy costs, all those things we need jumped up at the start of what has been cheerfully labelled ‘Awful April’.
“Those price hikes will be offset for some by the rise in the National Living Wage and increases to the state pension and benefits, which is another consideration for those Monetary Policy Committee members who will have to make their decision about where interest rates go next ahead of April’s inflation data.
“It’s an unenviable task made even more difficult by the battering from what some have now dubbed ‘Storm Donald’ as the US president’s messy tariff policy wreaks havoc with the global economy.
“At 2.6% inflation is ahead of the Bank’s 2% target but it’s likely to be sufficiently low to give rate-setters the green light to keep cutting the base rate, with markets pricing-in an 85% chance of a quarter percentage point cut at the next meeting.
“The bigger question is where do rates go next? We know increased household costs will colour next month’s data but Donald Trump’s tariff policy could potentially result in a dumping of lower-priced goods on UK shores. Concerns about global growth may keep the oil price subdued, though homegrown issues like increased labour costs could result in a significant fall in employment and lower wage growth.
“The Bank had forecast inflation to peak at around 3.7% in the summer, but that forecast could be scaled back as the spectre of a trade war looms over the global economy.”
26 March 2025: Policymakers Keep Eye On April Price Hikes
UK prices rose by 2.8% in the year to February, down from the 3.0% increase recorded in January, writes Kevin Pratt.
Today’s figures from the Office for National Statistics will be welcomed by the Chancellor, Rachel Reeves MP, as she adds the finishing touches to her Spring Statement, due later today. The high cost of borrowing is seen as one of the brakes on economic growth – a key goal of the Labour government.
However, the positive news will be tempered by the fact that significant inflationary pressures remain within the economy, including a raft of price increases in April.
February’s fall was attributed in part to a decline in the cost of women’s clothes. This was offset to a degree by a rise in the price of alcoholic drinks.
The modest reduction in the rate at which prices are rising may lead to the Bank of England reducing its benchmark Bank Rate, which stands at 4.5%, although it may wait for clearer signs it is winning the battle to bring inflation closer to the government’s target of 2%. It has said inflation may peak at 3.75% in the autumn.
The Bank Rate was held at its current level last week (see story below), and there will be another inflation announcement by the ONS before the next Bank Rate decision on 8 May. Around two million variable rate and tracker mortgages are adjusted in line with any change to the Bank Rate.
Savings interest rates are also heavily influenced by movements in the Bank Rate, with recent falls in the amounts paid by leading accounts attributed to the decline in the Rate from its recent high of 5.25% in August last year.
Inflation is likely to be stoked further by upcoming price increases, including a 6.4% rise in the energy price cap on 1 April, hikes to water, mobile and broadband bills, higher rates of vehicle excise duty, a £5 increase in the cost of a TV licence and a hefty near-5% rise in council tax for millions of households.
Employers are also warning that the increase to their National Insurance Contributions from 6 April will stymie growth by limiting recruitment at one end of the scale and triggering redundancies at the other.
Global issues such as the imposition of trade tariffs and geopolitical instability are also contributing to the pervading sense of gloom about the health and prospects of the economy.
According to the ONS, the UK’s rate of inflation was higher than that of France (0.9%), Germany (2.6%), and the EU average (2.7%) in the 12 months to February.
Danni Hewson, AJ Bell’s head of financial analysis, said: “This dip in inflation was slightly deeper than had been expected by economists, but it’s hard to get excited about one month’s data when we’re all hyper aware that things are about to get more difficult once again.
“In many cases, wage increases will help offset the price hikes hurtling our way, as will the uprating in pensions and benefits, though in most cases those extra pennies have probably already been spent.
“The big question on many homeowners or would-be homeowners’ minds will be whether the Bank of England cuts rates in May and how far they might fall by the end of the year. Expectation of a May cut has edged up slightly, but [the Bank] has a lot to consider, balancing the need to boost a stagnant economy with nudging inflation back towards target at a time global trade concerns are prevalent.”
20 March 2025: Inflation, Tariffs And War Rattle Policymakers
The Bank of England held its benchmark Bank Rate at 4.5% today amid fears that turbulence across the world economy could trigger higher inflation and hamper economic growth, writes Kevin Pratt.
The Federal Reserve, the Bank’s US counterpart, yesterday held rates in the range 4.25% to 4.5%. Both central banks are nervous about the potential inflationary impact of President Trump’s aggressive use of tariffs on goods imported to the US.
In the UK, the ‘wait-and-see’ approach of the Bank’s nine-strong Monetary Policy Committee, which voted 8-1 in favour of keeping any rate cut on ice, reflects key events in the coming days.
One member preferred to reduce the Bank Rate by 0.25 percentage points, to 4.25%.
Next Tuesday sees the release of inflation figures for February. The Bank uses high interest rates to keep a lid on prices, but January’s increase in the annual rate from 2.5% to 3% has stoked alarm about further rises in 2025, with the Bank’s own forecasts suggesting the figure might spike at 3.75% in the autumn.
The Chancellor, Rachel Reeves MP, will also deliver her Spring Statement – a Budget in all but name – next Wednesday, with expectations that she is prepping deep cuts in public spending, further destabilising the economy.
April will see employers’ national insurance contributions increase from 13.8% to 15%, and the point at which these payments will be required will fall from £9,100 to £5,000. Companies say prices will rise and jobs will be lost as a result of the changes.
The energy price cap will also increase on 1 April, by a shock 6.4%, delivering a further blow to household finances. Policymakers are also edgy about the potential for geopolitical conflicts to inflict economic damage, with uncertainty clouding peace initiatives in Ukraine and Gaza.
The next Bank Rate decision will be made on 8 May. In its commentary on today’s ‘hold’ decision, the Bank said it expects inflation to fall in the autumn, but says it will remain alert to signs of lasting inflationary pressures: “A gradual and careful approach to the further withdrawal of monetary policy restraint [by reducing Bank Rate] is appropriate.
“Should there be greater or longer-lasting weakness in demand relative to supply, this could push down on inflationary pressures, warranting a less restrictive path of Bank Rate. Should there be more constrained supply relative to demand and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in inflation, this would warrant a relatively tighter monetary policy path.”
The Bank Rate influences how mortgage lenders price their deals, although they also reference how much interest commercial banks charge each other for loans. These so-called ‘swap’ rates have edged down in recent weeks allowing some lenders to trim the cost of their mortgages. However, the long-term impact of today’s Bank Rate announcement on the cost of borrowing remains to be seen.
Savers will hope that returns on deposits will remain at current levels. The number of accounts paying 5% or more has fallen in recent months, reflecting the reduction in Bank Rate from its recent peak of 5.25% to today’s 4.5%.
Discussing the impact of the Bank Rate hold on mortgages, Matt Smith at property portal Rightmove said: “Now that this expected interest rate hold is out of the way, all eyes are on May’s decision, where the current forecast is a second cut of the year.
“Since the last decision in February, average mortgage rates have trickled downwards slightly but pretty much stayed flat. We’re seeing lenders try to price competitively where they can to capture business during some of the busiest months of the year for home-moving.
“However, there isn’t much wiggle room for lenders to offer cheaper rates, and hopefully a second cut can spur forward another wave of falling rates, and bring average rates closer to 4% rather than 5%.”
Commenting on the rate hold in the US, Isaac Stell at Wealth Club said: “The decision to pause [rate reductions] has come amid economic uncertainty caused by the rambunctious Trump administration and its policy of tariff whiplash.
“With such an unpredictable leader at the helm of the world’s largest economy, the scope for policymakers to make effective decisions diminishes with every new announcement.”
The imposition by the Trump regime of the next swathe of US reciprocal tariffs is slated for 2 April – a date hailed by the President as ‘Liberation Day’.
19 February 2025: Hopes Fade For Near-Term Cuts To Bank Rate
The rate of inflation rose to 3% in the year to January, a steep uptick from the 2.5% recorded in December, writes Kevin Pratt.
The Office for National Statistics attributes the increase – which is beyond analyst predictions of a 2.8% rise – to higher prices for food, non-alcoholic beverages and transport costs.
The Bank of England said last month that it expects inflation to peak at 3.7% later this year as the economy is buffeted by inflationary pressures including higher rates of tax on alcohol introduced this month and the imposition of VAT on private school fees from the beginning of the year.
Energy bills are also expected to rise by around 5% from 1 April when the next price cap takes effect.
Businesses are also warning of wider price increases when their employer national insurance contributions increase in April.
The Bank’s inflation target is 2%. It uses higher interest rates to reduce demand across the economy and bring prices down, and today’s figure will stoke concerns that further cuts to the Bank Rate from its current 4.5% will be deferred.
The Bank Rate influences what lenders charge for mortgages and how much interest savers can earn on their deposits. It fell to its current level from 4.75% last month (see story below).
The next rate announcement from the Bank is due on 20 March. February’s annual inflation rate won’t be released until 26 March.
David Morrison at financial services firm Trade Nation said: “Today’s hotter-than-expected numbers will make it harder for the Bank of England to cut rates further. But markets have been expecting a pause in monetary easing following the Bank’s 25 basis point cut earlier this month.
“So, now it’s a question of how long that pause may be, and can we expect inflation to continue to trend higher from here?”
Nicholas Hyett at advisors Wealth Club said: “If there was any doubt about what the Bank of England would do at its March interest rate meeting there isn’t now. Headline inflation has jumped significantly, and came in some way ahead of market expectations.
“Higher prices for motor fuels and airfares have pushed up transport costs, while food and non-alcoholic drinks saw prices rise 3.3% year-on-year. Both will increase the squeeze on working households, as will the rise in council tax, which has seen owner-occupier housing costs rocket by 8% in 12 months.
“Making matters worse is the substantial uptick in core inflation – which strips out food and energy prices and is considered a better measure of domestically-generated inflation. With core inflation [at 3.7%] nearly twice the Bank of England’s target, we see little chance the Bank starts cutting rates again any time soon.”
6 February 2025: Economy Braces For Inflationary Headwinds
Homebuyers and savers are digesting the news that the Bank of England is cutting its influential Bank Rate from 4.75% to 4.5%, writes Kevin Pratt.
The move, which follows a fall in the rate of inflation in December from 2.6% to 2.5%, could lead to cheaper variable rate and tracker mortgages but may also see lower returns on many savings accounts.
The Bank’s inflation rate target is 2%. It uses high interest rates to deter borrowing and reduce demand across the economy, which in turn puts downward pressure on prices. The Bank Rate is reduced when it wants to stimulate activity and encourage economic growth.
Commentators say the Bank Rate cut is a necessary boost for the UK economy, and expectations are high that further reductions will be made throughout 2025. However, there is concern that inflationary pressures may mean the Bank keeps the rate higher for longer.
Many businesses have said that they will need to increase prices because their employer national insurance contributions will rise from April. The minimum wage is also set to rise, further adding to their costs.
The potential for international trade spats in the wake of President Trump’s use of tariffs against China is also unsettling market-watchers.
The Bank Rate cut will not affect homeowners on fixed-rate mortgages, although a continuing downward trajectory would lead to cheaper deals being available at the end of the current term.
Those on variable rate and tracker mortgages should see a reduction in their monthly costs in their next payment.
The best instant access and fixed-rate savings accounts pay just under 5% per annum interest, although with the latter, you must tie up your money for at least a year to get this level of rate.
The Bank’s nine-strong Monetary Policy Committee voted 7-2 in favour of today’s reduction, with the two dissenters favouring a deeper cut to 4.25%. The Bank has conceded that inflation is likely to rise this year, to 3.7% from its current 2.5%, with rising energy costs taking a significant part of the blame.
The Bank also said it expects the economy to grow by just 0.75% this year, having previously forecast a growth rate of 1.5%.
Nicholas Hyett, at Wealth Club, said: “Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy, too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
“Against that backdrop the Bank’s decision to cut rates is no surprise. Rate-setters and the government will be hoping a 0.25 percentage point cut provides the post January pick-me-up the economy needs.
“However, the real risks in the future are largely unknown. Will Trump’s trade war rock the global economy? Will the UK become a tariff target? How many jobs are at risk from rising labour costs? Will the Chancellor hike taxes again in the spring? With all those unknowable risks out there, this rate cut could be seen as much as a shot in the dark than a shot in the arm.”
15 January 2025: Rising Pump Prices Keep Rate Above Target
Inflation edged down to an annual rate of 2.5% in December, from 2.6% the month before, providing a glimmer of hope that the Bank of England might cut interest rates at some point in the coming months, writes Kevin Pratt.
The modest fall in the rates at which prices are rising, which was not expected by most analysts, may not be enough to trigger a reduction when the Bank announces its next decision on 6 February as inflation remains above its target of 2%. The rate fell to 1.7% in September but jumped to 2.3% in October before hitting 2.6% in November.
Other economic data, such as the recent fall in the value of sterling and an increase in the cost of government borrowing, suggests the Bank Rate may remain at 4.75%.
Inflation would need to fall further and stabilise around the 2% mark before a cut would be deemed appropriate.
The Office for National Statistics attributed December’s fall in the inflation rate to lower prices in hotels and restaurants. It said the effect of this was offset by increases in the cost of motor fuel and secondhand cars.
Nicholas Hyett at advisors Wealth Club said upward pressure on prices will mount in the spring when changes announced in last autumn’s Budget take effect: “There’s a significant risk that inflation will kick off again later in the year.
“Employers are set to start paying higher rates of National Insurance in April, pushing up labour costs. That is likely to see prices rise in sectors like hospitality and retail that employ substantial numbers of people and where margins are already pretty thin.
“That risks sparking an inflationary spiral. It could be a tense few months as we wait and see how things play out.”
Analysts will also monitor the impact of President Trump’s economic policies when he takes office next week. He has promised steep tariffs on goods imported to the United States, which would adversely affect UK exporters.
Nathan Emerson, head of estate agent trade body Propertymark, remained optimistic about the prospects for the housing market, where mortgage rates are heavily influenced by Bank of England policy decisions: “With the rate of inflation remaining fairly static in December, and at a time when there are reports that the economy is being impacted by the after effects of the Budget and wider global events, this will likely bring a sigh of relief for many.
“If inflation continues to creep downwards throughout the rest of the year, it would be encouraging to see the Bank of England have the confidence to drop interest rates to levels that can provide additional comfort to consumers embarking on their next or first step on the housing ladder.”
19 December 2024: Multiple Bank Rate Cuts Unlikely In 2025
Worries that the battle against inflation is not yet won have prompted the Bank of England to hold interest rates at 4.75%, writes Kevin Pratt.
Yesterday, the Office for National Statistics said that inflation for the year to November increased to 2.6% from 2.3% in October, having stood at 1.7% in September (see story below). The Bank’s inflation target is 2%. It said today that it expects it “to continue to rise slightly in the near term.”
The Bank deploys high interest rates to increase the cost of borrowing and thereby reduce economic activity, which eases inflationary pressures. In the summer, expectations grew that the Bank Rate could fall to 4.50% or even 4.25% by the year-end, with further falls in 2025.
This optimism has been dashed not only by rising prices but also by the adverse reaction to the Autumn Budget across the business sector. Firms face increased costs in April next year, when their National Insurance contributions will rise and wage bills will be pushed higher by an increase to the minimum wage.
The Bank’s nine-member Monetary Policy Committee, which sets the Bank Rate 10 times a year, voted 6 – 3 to hold rates at 4.75%, with three members preferring a cut to 4.50%. Its next meeting is on 6 February 2025.
Yesterday, the Federal Reserve, the Bank’s US equivalent, announced a 0.25 percentage point cut in its main interest rates, which now sit in a range of 4.25% to 4.50%. However, it signalled that there is no guarantee of further cuts next year.
Commenting on the hold in the Bank Rate, Laith Khalaf, head of investment analysis at AJ Bell, said: “Wherever you look, the green shoots of an inflation revival seem to be pushing up the turf. Private sector pay growth rose to 5.4% at the latest reading, and with minimum wage rising by 6.7% from April, that means more upward pressure on pay is in the post.
“Also arriving in April courtesy of the new Chancellor will be an increase in employer National Insurance, at least some of which will find its way into higher consumer prices.
“As inflationary forces gather, the Bank of England isn’t going to be gung-ho about cutting interest rates. Nonetheless, the fact three members of the MPC voted to cut the Bank Rate by 0.25 percentage points is a dovish signal which markets will likely respond to.
“The market is still pricing in two further rate cuts next year, but this is a big climb down in the course of just 12 months. At the beginning of 2024, the market was expecting no fewer than six interest rate cuts in the course of the year – we got two.”
The Bank Rate helps determine the cost of mortgages, and there were hopes that a rate cut would provide impetus to the housing market. Matt Smith at property portal Rightmove said: “While not the early Christmas present that many would have wanted, it was widely expected, and must be considered against a backdrop of inflation being at the top end of forecasts, and wages having increased at a higher rate than expected.
“We don’t expect any reductions in mortgage rates over the next few weeks, but as we progress into 2025, lenders are likely to look at ways to take advantage of increased demand as the busier home-buying season starts.
“We predict average mortgage rates could trickle slowly down towards around 4.0% next year, though this depends on the impact of a variety of unpredictable factors, including geo-political tensions and inflation.”
18 December 2024: Prices Rising Above Bank’s 2% Target
The rate at which prices are rising year-on-year increased to 2.6% in November, up from 2.3% the month before, writes Kevin Pratt.
- annual inflation at 2.6% in November compared with 2.3% in October
- annual core inflation (exc food and energy) at 3.5%, up from 3.3%
- on a monthly basis, prices rose by 0.1% compared with a fall of 0.2% in November 2023.
The Bank of England’s target for inflation is 2%. Today’s figures from the Office for National Statistics have dampened hopes that the Bank will cut interest rates tomorrow when it meets to set the influential Bank Rate.
This rate, which helps determine the cost of mortgages and the return on savings, has been trimmed from 5.25% to its current 4.75% in recent months on the back of inflation figures below or closer to 2%.
But indications that inflationary pressures are lurking within the economy are likely to see the Bank stay its hand. The first rate-setting meeting in 2025 will be on 6 February.
Isaac Stell, investment manager at Wealth Club, said: “The strength of the latest inflation figures, coupled with Tuesday’s higher-than-expected wage growth data, may well put to bed the possibility of a pre-Christmas rate cut.
“Although the public may feel [Bank governor] Andrew Bailey and co are channelling their inner Scrooge, prudence on the Bank’s part seems sensible, as no one wants to see the inflationary ghosts of Christmas past return.”
Optimism about the continued downward path of the Bank Rate has been soured by the negative reaction of the business sector to the Autumn Budget. The Chancellor announced increases in employer national insurance contributions and a rise in the minimum wage, to take effect from April next year.
The fear is that prices will rise to counter these higher costs. The possibility of international trade spats and associated potential supply chain disruption in 2025 are adding to the gloomy outlook.
Stell added: “The indication of prices hikes have been coming thick and fast. There may be cuts to jobs and less generous pay rises to boot. Those hoping to see a continuous stream of rate cuts in 2025 will likely be disappointed.”
Nick Hale, head of house moving group Movera, said: “There is little festive cheer in today’s figure. Driven by higher energy costs and services inflation, the figure is even further adrift from the Bank’s target. Christmas is unlikely to come early on Thursday, as its Monetary Policy Committee is predicted to hold off on lowering rates.
“It would be good to think that the rise is a temporary blip. But there are too many unknowns, including the longer term impacts of the Budget, which has so far rattled business confidence.”
20 November 2024: Steep Rise As Bank Mulls Rates Move
Inflation leapt to 2.3% in the year to October from 1.7% the month before – a shade higher than economists were expecting. On a monthly basis, prices were up 0.6%, writes Kevin Pratt.
The blame for the increase has been laid at the door of energy prices, which spiked on 1 October when the energy price cap – which regulates how much suppliers can charge per unit of energy consumed, along with standing charges – shot up by 10%.
This rise, prompted by higher prices on wholesale markets, took the cap to £1,717 a year. That is the amount a household with typical consumption levels can expect to pay, and is £149 higher than previously.
Set quarterly by the energy market regulator Ofgem, the cap will rise again on 1 January 2025, this time by an estimated 1%, taking it to around £1,736 a year.
According to the Office for National Statistics, the core rate of inflation, which excludes volatile items such as energy, food, alcohol and tobacco, rose by 3.3% in the 12 months to October 2024, up from 3.2% in September.
The Bank of England pays close attention to inflation when setting its Bank Rate, which influences lending rates across the economy, including mortgages. The rate was reduced from 5% to 4.75% earlier this month, and the next decision is due on 19 December.
The Bank’s inflation target is 2%, but commentators believe October’s rise to 2.3% will likely be seen as a blip rather than a reversal of the recent downward trend.
Isaac Stell, investment manager at Wealth Club said: “The surprising strength of the latest inflation figures gives the Bank of England a conundrum. With economic growth in the UK stalling, rate cuts would seem like the appropriate medicine, but cutting rates into inflationary strength wouldn’t usually be what the economic doctors order.
“With inflation close to target and one-offs [such as the energy price cap hike] causing the latest spike, the Bank should feel confident about reducing rates by 0.25 percentage points in December, helping to ease the burden on consumers facing a rise in their heating bills as the winter weather sets in.”
Danni Hewson at AJ Bell sounded a note of caution about inflationary pressures in the economy: “No one will be surprised that the headline rate of inflation has ticked up again, however unwelcome it might be. Households across the country will be eyeing their thermostats as the cold snap bites, hyper aware that the cost of energy shot up at the start of October when the new price cap came into effect.
“At 2.3% inflation is only slightly above the Bank’s 2% target but it does disrupt a three-month downward trend and market expectation of a further interest rate cut in December is now only 16%, with almost half thinking that even February will be too early for the Bank to cut again. The fact that core inflation edged up a touch will give the Bank’s rate-setting committee pause for thought.
“Just at a point people were beginning to feel hopeful that the past couple of years of sky-high inflation was behind them, there’s niggling concern about what might be to come. Though there is no indication that the factors at play will result in anything like the 11.1% high from October 2022, those price increases are still being felt by us all.”
7 November 2024: Bank Rate Down To 4.75%
Mortgage deals could be cheaper in the coming days and weeks following the Bank of England’s decision to cut its Bank Rate from 5% to 4.75%, writes Kevin Pratt.
The cut was expected because of the steep fall in the rate of inflation in September, from 2.2% to 1.7%. The Bank uses higher lending rates to sap demand from the economy in a bid to slow down rising prices.
Banks and building societies may now be thinking about trimming the cost of new loans for mortgage borrowers and those remortgaging their property to reflect the lower cost of institutional borrowing.
Existing fixed-rate deals will remain at their current prices while loans linked to the Bank Rate – known as trackers – will fall with immediate effect.
Lenders’ variable rate deals are also likely to fall, but the timing and size of reductions will vary by lender.
Borrowers tempted to remortgage away from their current loan to a cheaper offer should take into account the clutch of charges and fees they may encounter, including a possible early repayment charge, arrangement and legal fees, and the cost of a property valuation.
While today’s move by the Bank of England was not a surprise, forecasts about further cuts in December and in 2025 have been thrown into question by government borrowing and spending measures announced in last month’s Budget and Donald Trump’s victory in Tuesday’s US election.
If the new President follows through on promises to cut taxes and impose hefty tariffs on imports to the US, a likely consequence is an increase in the rate of US inflation in 2025. If the Federal Reserve – the Bank of England’s US equivalent – eventually raises interest rates in response, other central banks may be forced to follow suit.
That said, the Fed announced its own quarter-point cut to interest rates today, bringing them down to a range of 4.5% to 4.75%. This was in response to inflation in September falling to 2.1%, a whisker above the Fed’s target of 2%.
The Bank of England Governor, Andrew Bailey, told the BBC that, while the trend for UK interest rates to fall will continue, they will not be cut too quickly or by too much: “The path is downward from here. We’ll see how quickly and by how much. I do emphasise the word ‘gradual’ and the reason for that is there are a lot of risks out there in the world at large and also domestically.”
Responding to the Bank Rate cut, Nathan Emerson trade association of Propertymark said: “Today’s announcement will be welcome news for buyers, especially for those who may have been delaying any house move due to potential uncertainty on their overall affordability.
“Proposed changes to Stamp Duty thresholds from next April mean it’s highly likely we may see buoyant activity in the market across the winter months.”
Chancellor Rachel Reeves confirmed in the Budgeet that the threshold at which property buyers must state paying Stamp Duty in England and Northern Ireland will fall from £250,000 to £125,000 from 1 April 2025. The threshold for first-time buyers will fall from £425,000 to £300,000.
John Fraser-Tucker at Mojo Mortgages said: “This move by the Bank could mark a significant turning point for the mortgage market. This second rate cut of the year brings relief to both homeowners and potential first-time buyers.
“We’re optimistic this change will encourage mortgage lenders, who have recently raised their rates, to rethink their pricing strategies and lower their rates in the coming weeks.
“Existing mortgage holders should be pleased with this decision, as it presents new possibilities for securing better deals or benefiting from adjustments on current products, potentially easing financial pressures.
“If you’re planning to remortgage in the next six months, a mortgage broker can help you navigate the market and secure a new rate.”
Laith Khalaf at AJ Bell said: “This interest rate decision was widely anticipated, but the path to future cuts has been muddied by Rachel Reeves’ Budget and the election of Donald Trump as US president.
“Both these events have the potential to be inflationary, which would mean interest rates staying higher for longer. That doesn’t necessarily imply rates won’t come down, but the pace of decline is likely to be slower.
“The market is still pricing in another rate cut either in December or February, and then another one by May 2025. There are some more bullish voices out there, including Goldman Sachs, who have forecast UK base rate to fall to just 2.75% by next autumn. The fact the decision to cut rates was almost unanimous will put some powder in this argument.
“But if Donald Trump pushes ahead with a restrictive trade policy, that would really put the cat among the pigeons when it comes to UK inflation and interest rates.
The next Bank of England Bank Rate announcement is on 19 December.
October’s inflation rate will be announced by the Office for National Statistics on 20 November.
16 October 2024: Drop From 2.2% Likely To Spur Bank Rate Cut
Prices rose by 1.7% in the year to September, down sharply from 2.2% in August, thanks largely to falling fuel pump prices paid by motorists and lower airfares, writes Kevin Pratt.
This is the first time the annual rate of inflation has been below the Bank of England’s target of 2% since April 2021. It hit a recent peak of 11.1% in October 2022.
Some forecasters expect the Bank to cut its main interest rate from 5% to 4.75% at its next Bank Rate meeting on 7 November. This would stimulate activity by making borrowing cheaper and help ward off any threat of economic stagnation that might accompany a sustained below-target inflation rate.
The European Central Bank cut its main interest rate by 0.25 percentage points to 3.25% on 17 October, saying: “We did this because incoming data show we are well on track to reach our inflation goal.” Inflation in the eurozone in September also stood at 1.7%. The ECB’s target is 2%.
Lindsay James at Quilter Investors said: “With inflation falling below this level and the pace of wage growth slowing, the conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too.”
The Bank trimmed the Bank Rate from its recent high of 5.25% in August – the first cut since March 2020, when it reached 0.1%. This summer’s reduction indicated a growing belief that the battle against inflation was being won, but this outlook could be soured if geopolitical instability causes global economic disruption, including a spike in oil prices.
Jonny Black at investment company abrdn adviser said: “This is a promising sign for rate setters. Andrew Bailey [governor of the Bank] has hinted that, if the positive inflation trend continues, we could see a bolder approach to cutting interest rates. But with the geopolitical landscape remaining turbulent, there’s risk of volatility that could lead to sharper price rises.”
A number of mortgage lenders, including NatWest, Santander and Co-op, have bucked recent trends by increasing the cost of their loans in the past few days. Brokers suggest that, while the long-term trend for the cost of home borrowing is downwards, there may be periods where rates fluctuate to take account of broader volatility.
Discussing NatWest’s 0.3% hike in the cost of some of its mortgages, Nick Mendes at broker John Charcol said: “These increases mark a sharp reversal from recent months when rates have been falling. But it’s important to note that this does not necessarily signal the long-term direction of mortgage rates over the next 12 months.”
Isaac Stell, investment manager at Wealth Club, said: ” With inflation tumbling, the Bank should feel confident about stepping up to the crease at its November meeting.
“With declining private sector wage growth, falling prices, and a Government focused on tax rises, an easing of the burden for the public will be welcome. Will the Bank play with a straight bat or will they look to go big and swing for the boundary? Today’s numbers suggest they could well do the latter.”
September’s inflation figure is traditionally used to determine the rate of increase in certain benefits, including universal credit, the following April. Danni Hewson at AJ Bell says a 1.7% rise will put pressure on household budgets: “Today’s data is massively important for many people on low incomes who rely on benefits to help them get by.
“Over the past couple of years, they’ve seen quite chunky increases in the amount of cash that drops into their accounts every month but with inflation falling below the level that had been anticipated it sets up a benefit increase way below what they’ve come to expect.
“The most important thing to remember while thinking about inflation is that for the most part prices went up and stayed at their elevated levels. Wages have nudged higher, as have benefit payments, but most people will still find their standard of living is way below where it was before the pandemic.”
Figures out yesterday from ONS relating to average earnings confirm that State pensions will increase by 4.1% from April next year.
Under the terms of the government’s triple lock, State pensions rise each April by the highest of three measures: 2.5%, the rate of inflation in the preceding September (1.7%), or the rise in average earnings in the three months to the preceding July (now confirmed at 4.1%).
The current full state pension is £221.20 a week, or £11,502.40 a year. A 4.1% hike will take it to £230.30 a week, or £11,975 a year.
The ‘old’ basic state pension, paid to pensioners who retired before April 2016, is £169.50 a week, or £8,814 a year. With a 4.1% uplift applied, this will rise to £176.45 a week, or £9,175 a year.
19 September 2024: Analysts Expect Cuts Before Christmas
The Bank of England held its main interest rate at 5% today despite a 0.5% percentage point cut by the US Federal Exchange last night, which lowered its lending rate to 4.75%, writes Kevin Pratt.
The Bank’s Monetary Policy Committee (MPC) remains concerned about ‘persistent’ inflation in the UK economy. Prices rose by 2.2% in the year to August, the same as the month before and just above the Bank’s 2% target, but in the service sector the figure was 5.6% (see story below).
Interest rates are raised and maintained at high levels by central banks to sap demand and thus ease inflationary pressures. This comes at the price of slowing economic activity, with individuals and businesses reluctant to borrow money for purchases and investment.
The Federal Reserve implemented its rate cut to stimulate the US economy after a range of indicators suggested there was a growing danger of recession if borrowing costs were not reduced. Further cuts are expected later this year and throughout 2025.
The MPC cut the Bank Rate to 5% from 5.25% on 1 August. Commentators believe it will be reduced at the next scheduled meetings in November or December.
Eight of the nine-strong Committee voted in favour of holding the Rate at 5% today, with one arguing for a cut to 4.75%. The Bank said the decision was determined “by the need to squeeze persistent inflationary pressures out of the system so as to return CPI inflation to the 2% target both in a timely manner and on a lasting basis”.
The Bank Rate influences borrowing and savings rates in the wider market, but many mortgage lenders have already cut their prices in recent weeks in expectation that the long-term trend in rates is downwards.
Ryan Davies at Bluestone Mortgages said: “Today’s decision will be a blow to borrowers across the country who were hoping for a further rate cut.
“However, it’s not all doom and gloom. Over the last few weeks, we’ve seen increased competition in the mortgage market, with a growing number of lenders now offering sub 4% mortgages.”
Dean Butler at Standard Life said: “There had been some discussion of a possible further move down to 4.75% this month following the first US rate cut in four years, however the latest inflation data showing the headline rate still above target with rises in service and core inflation seems to have put this to rest for now.
“The 10% energy price cap kicking in from 1st October seems likely to push headline inflation up further, so it seems safe to say any rate cuts in the near future will be incremental.
“This will of course remain a challenge for people with housing costs and unsecured debt like credit card balances, but savers continue to have the opportunity with rates on best-buy instant access cash savings accounts hovering around the 4.75% mark and some fixed deals over 5%.”
The next Bank of England rate announcements are on 7 November and 19 December.
18 September 2024: US Leads Way With Chunky Base Rate Cut
The headline rate of inflation rose by 2.2% in the 12 months to August, unchanged from July, according to figures out today from the Office for National Statistics, writes Kevin Pratt.
But once volatile prices for items such as food, alcohol, tobacco and energy are excluded, the core figure jumped from 3.3% to 3.6%, while inflation in the service sector increased from 5.2% to 5.6%.
These figures may deter the Bank of England from reducing its main interest rate from 5% when its decision-making Monetary Policy Committee meets tomorrow.
The Bank Rate is used to control inflation, with higher borrowing costs seen as the most effective way stem price rises. It was reduced to its current level from 5.25% in August, the first cut since 2021.
Nicholas Hyett, investment manager at Wealth Club, said: “High core inflation increases the chances of the Bank choosing to leave interest rates unchanged.
“It’s a delicate balance to strike though, especially when headline numbers are driven by big movements in a single, seasonal variable like air fares [up 22.2% in August]. Leave rates too high for too long and risk an economic crash landing and a painful recession, cut them too soon and the danger of an inflationary tailspin increases.”
The Bank will also take into account today’s interest rate decision by its equivalent in the US, the Federal Reserve, which trimmed its rates by 0.50 percentage points so they now sit in the range 4.75% to 5%.
Both central banks – in common with others worldwide – have long-term headline inflation targets of 2%.
Commenting on the news that UK inflation was unchaged at 2.2% in the year to August, Richard Carter at Quilter Cheviot said: “Today’s figures will likely bolster predictions that the Bank will hold rates this week. It has already cautioned investors not to expect sequential rate cuts at every meeting given inflation is still not cemented at the 2% target and is likely to rise further as the year continues.
“Despite stagnating growth over the summer months there is not going to be a swift rate cutting cycle.”
The Bank decides interest rates 10 times a year, with the next meeting after tomorrow set for 7 November and the final one of 2024 on 19 December. Economists remain largely confident that, if there is no Bank Rate cut tomorrow, cuts will be forthcoming later this year and early in 2025, which had led to reductions in the cost of mortgages in recent weeks.
Commenting on the 0.50 percentage point reduction in rates by the Federal Reserve, James McCann at investment house abrdn said: “The Fed has started to take its foot off the brakes of the US economy as inflation cools and concerns mount over the growth outlook.
“This larger-than-usual move illustrates a degree of urgency at the Fed to start quickly dialling back policy restrictiveness. Indeed, its Committee members expect that this will be the first of a series of cuts, with rates to fall another 50 basis points by the end of this year, and 100 basis points in 2025.
“The key for the Fed now will be calibrating the pace of easing carefully as inflation continues to drift towards target and the economy slows.”
14 August 2024: Energy Bills Falling More Slowly Reverses Trend
Inflation in the year to July edged higher to 2.2%, up from the Bank of England’s target of 2% recorded for the 12 months to June, writes Kevin Pratt.
The rate at which prices are rising hit a recent historic high of 11.1% in October 2022. It has been falling since then thanks mainly to reductions in energy prices, which peaked in the wake of Russia’s invasion of Ukraine in February of that year.
July’s increase, expected by many economists, was blamed by the Office for National Statistics on gas and electricity prices falling by less than they did last year. Price reductions in the hospitality sector helped counter this upwards pressure.
Inflation data is scrutinised by market-watchers because the Bank of England uses interest rates to help achieve its 2% target, which is set by the government.
Last month the Bank reduced its main rate to 5% from 5.25%, reached in August 2023 in the battle against rising prices. It has stated that it expects inflation to fluctuate in the coming months, so today’s figure is not expected to alter its strategy of cutting borrowing costs, although the timing of further reductions remains uncertain.
The next Bank Rate decision is on 19 September, with August’s inflation figure due out the day before.
The latest US inflation figures are also out today, showing a 2.9% year-on-year increase in prices, just below expectations. This has prompted speculation that the US Federal Reserve will announce an interest rate cut when it next meets on 18 September.
Further Bank of England interest rate announcements are scheduled for November and December.
The 0.25 basis point fall in the Bank Rate in July triggered a wave of rate reductions in the mortgage market, with a number of lenders now offering 5-year fixed rates below 4%.
Peter Stimson at MPowered Mortgages said: “With inflation back above target, a base rate cut in September is now likely off the cards. However, there’s still the possibility for a cut before the year is out in what remains a highly fluid market.
“Even though inflation has risen, there is unlikely to be an impact on mortgage rates as this has already been priced-in. The current lending environment is nothing short of cut-throat. Competition between lenders is the most intense I have seen in the last 30 years.”
Ed Monk at Fidelity International said: “A rise in the headline rate of inflation is less important than a slight easing in core inflation – down from 3.5% to 3.3% – which suggests the trajectory for price rises is still downwards. Easing wage rises reported yesterday point to a similar trend and suggest we remain on track for further cuts to interest rates in the months ahead.
“Lower rates have tended to be positive for stock markets, but investors should always be aware of the wider picture – rates are coming down because there is less momentum in the economy. The Bank of England has begun to ease monetary policy and will be watching growth data closely for signs of a more sudden slowdown that could accelerate the timetable for rate cuts.
“As rates fall, cash will become less attractive. Many investors have sought the safety of cash deposits this year as rates have stuck above the rate of inflation, but they may be forced to reassess as interest rates fall.”
August 1 2024: Bank Rate Down To 5% In Narrow Voting Split
The Bank of England’s Monetary Policy Committee (MPC) has voted to cut interest rates from 5.25% to 5%, marking the first cut to interest rates since March 2020, writes Jo Thornhill.
The MPC voted 5-to-4 in favour of the reduction to the benchmark Bank Rate, which had remained at a 16-year high since August last year. The four dissenting members of the Committee voted to keep the Bank Rate on hold at 5.25%.
In contrast, the vote was split 7-to-2 in favour of holding rates at the last MPC meeting in June.
Market predictions had initially expected ‘no change’ to rates today as, despite being at its 2% target, the Bank waited for inflation to settle. But yesterday’s news that the US Federal Reserve remained unchanged at its target range of 5.25% to 5.50%, with expectations of a cut in September, tipped the balance in favour of a cut for the UK.
While today’s rate cut is not expected to lead to a sustained campaign of reductions to Bank Rate, it will be welcome news to around 700,000 mortgage borrowers due to remortgage away from low fixed rates in the second half of 2024, according to UK Finance, as it’s likely to trigger reductions to remortgage rates.
However, many major lenders have already been cutting the cost of mortgage deals across the board as interest rates settled.
Borrowers paying tracker mortgage rates (which move directly in line with the Bank Rate) will see their monthly payments fall by up to £28 on average, according to UK Finance. This is an annual saving of £336.
The calculation is based on an average tracker mortgage size of £136,512 and an average tracker pay rate of 6.47% (before today’s rate cut), according to the banking trade body’s data.
Mortgage broker Nick Mendes at John Charcol said: “Today’s rate cut is a positive step for the property and mortgage market, marking the first interest rate cut in over four years, finally kick-starting the downward Bank Rate cycle.
“Positivity spreads quickly and while today’s rate cut would have already been priced in, this will undoubtedly revitalise market activity. Mortgage holders nearing the end of their fixed-rate period and prospective buyers can now make informed decisions with greater confidence, rather than delaying further.
“For borrowers approaching the end of their fixed-rate terms, this decision brings a much-needed sigh of relief following months of fluctuating mortgage rates and reductions not aligning with early market expectations.”
Mr Mendes pointed to Nationwide which recently became the first high street lender to reprice mortgage rates below 4% again, and said that other lenders are now expected to follow suit: “We can anticipate the downward trend in fixed-rate costs to continue now, as markets price in further rate cuts and lenders use every opportunity to stay ahead of the competition.”
Karen Barrett, chief executive and founder of Unbiased, the directory for independent financial advisors, said: “After months of waiting, the Bank of England has finally cut the Bank Rate, offering much needed relief to millions of households that have been struggling.
“This decision symbolises a significant turning point for our country – economically and psychologically – and raises hopes that this could be the start of our journey out of the woods.”
Ms Barrett added that savers should prepare for the eventuality that rates will now start falling and to make the most of high-interest accounts while they are still available.
But Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, warned that today’s cut will not lead to a rapid succession of further reductions to Bank Rate.
She said: “Inflation has the potential to nudge upwards later in the year when declines in energy prices in 2023 fall out of the annual comparison while Chancellor Rachel Reeves’ public sector pay rises could also have an inflationary effect, so the Bank of England may be cautious on the timing of its next rate move.”
The next Bank Rate announcement is scheduled for 19 September 2024.