Interest rates on knife-edge following a surprise drop in inflation
All year the Bank of England have continuously hiked up interest rates but, as inflation has dropped to 6.7% pressures could be eased.
This morning, statistics from the Office of National Statistics (ONS) revealed the rate of inflation dropped to 6.7% last month. The news has come has a happy surprise as fuel costs over the past few weeks have skyrocketed, suggesting inflation levels were going to increase to 7%.
The ONS claimed slower increases in the cost of food helped the annual inflation rate drop to 6.7% in August from 6.8% in July – the lowest rate experienced since February 2022.
Experts have claimed that not only will the fall be beneficial to people’s pockets, but news of inflation reducing could leave the Bank of England’s decision on whether to continue increasing interest rates on a Knife-edge.
Markets had been predicting the Bank would make a final increase in borrowing costs in its most aggressive tightening yet, but after today’s drop in inflation the decision remains uncertain.
The Bank of England have previously hiked up interest rates 14 times since December 2021 in a bid to stop the country from entering a recession and the UK’s central bank is set to announce whether this pattern will continue tomorrow.
Economist at the Dutch bank ING, James Smith said: ‘We’re still tempted to say the Bank of England will hike rates tomorrow. But it’s a close call, and both wage and inflation data suggest the end of the current tightening cycle is very close to its conclusion.’
As well as the cost of food helping to bring down the levels of inflation falling prices of for hotels and air fares compared with July helped slash rates last month.
However, the reduction in the inflation rate does not mean prices are falling, simply that they are rising at a slower pace. While the cost of food and drink increased slowly, prices were still 13.6% higher in August compared with a year earlier, according to the ONS.
Commenting on the news, Charles White Thomson, CEO at Saxo UK, said: ‘A modest and surprising improvement in UK year on year inflation from 6.8% in July to 6.7% in August. Food prices were the largest downward move, though still at 13.6%, while motor fuel was the largest upward contribution.
‘The UK remains an inflationary outlier and the pressure remains on the Bank of England to suppress and manage inflation – or public enemy number one – and we expect a 25bp interest rate hike to 5.5% on the 21st September.’
Image: Openverse
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