Blow for borrowers as summer interest rate cut hopes fade despite inflation falling

Hopes of a summer interest rate cut faded further yesterday despite inflation falling to its 2 per cent target for the first time in nearly three years.

The Bank of England is widely expected to leave rates on hold when officials meet today.

And despite the cheer provided by yesterday’s inflation figures, markets are increasingly convinced they will remain at the same level at their next meeting in August.

That is likely to disappoint millions of borrowers after the Bank – run by governor Andrew Bailey (pictured) – strongly hinted earlier in the year that a summer rate cut was on the cards.

Data from the Office for National Statistics (ONS) showed consumer price index (CPI) inflation fell to 2 per cent in May, down from 2.3 per cent in April. 

It means that the UK has beaten both the eurozone and the US in the race to bring down inflation. 

In the single currency area it is 2.6 per cent and in America 3.3 per cent.

Prime Minister Rishi Sunak said it was evidence that his economic policies were working and urged voters not to ‘put all that progress at risk with Labour’.

But despite the inflation target being achieved, markets see a 95 per cent chance that rates will remain on hold today. 

And the chances of an August cut have been reduced to less than 30 per cent.

Instead, traders are betting that the first move from the Bank will come in September with one further cut likely by the end of the year. 

That is because inflation in the services sector – which rate-setters have said they are closely monitoring – is proving tougher to bring down than the headline rate.

At 5.7 per cent in May, it was higher than economists had expected.

The Bank also predicts that headline CPI will move up again later this year. It is also wary of strong wage growth – at 6 per cent – which could stoke further price rises. 

Yet hitting the 2 per cent inflation target – for the first time since July 2021 – still represents a watershed moment after a prolonged crisis when it soared to more than 11 per centin the autumn of 2022.

That was spurred by Russia’s invasion of Ukraine, which pushed up energy and food prices.

Food inflation had reached a staggering 19.2 per cent in March last year but has come down to 1.7 per cent, the lowest level since October 2021. ]

Deutsche Bank economist Sanjay Raja said: ‘The UK has won the race in getting headline CPI back to target – even if temporarily. 

While calls for an imminent rate cut will grow, given headline CPI’s descent to 2 per cent, there’s likely to be growing concerns around the stickiness surrounding services inflation.’

Today’s decision will be particularly closely scrutinised because rate-setting officials, who normally signpost their thinking to the markets via regular speeches, have been silent since the General Election was called.