The Bank of England could cut interest rates multiple times this year traders are predicting.
The Office for National Statistics (ONS) said that for the first time this year the consumer prices index (CPI) increased to 2.2% in July from 2% in May and June.
For the sixth consecutive month services CPI inflation fell from 5.7% to 5.2% and the money markets are indicating there is a 45% chance rates will be cut to 4.75% in September.
They also predict there will be at least two rate cuts this year and the base rate could fall as low as 4.5%.
Yael Selfin, chief economist at KPMG UK, said: “Despite a modest rise, inflation was relatively subdued in July as weaker core and food price inflation largely offset the diminishing impact of earlier falls in energy prices.
“This should provide a degree of comfort for MPC members as the Bank’s own forecasts earlier this month pointed to a sharper uptick.”
Deutsche Bank also believes that it possible the UK will see multiple interest rate cuts before the end of the year.
“We will get another CPI report ahead of the September decision. The next round of inflation and labour market data will be crucial in deciding whether the MPC could push through a September rate cut.”
Governor Andrew Bailey said, “We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much.”
“The sharp fall in services inflation from 5.7% to a two-year low of 5.2% will reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year,” Ruth Gregory, deputy chief UK economist at Capital Economics, said.
4.9% was bigger than the drop to 5.6% we had forecast.
“And importantly for the Bank of England, the decline in services inflation from 5.7% to 5.2% was much bigger than anyone anticipated,” Gregory added.
Neil Birrell, CIO at Premier Miton Investors, said: “The second quarter seems like a long time ago, but the GDP data confirms that the UK economy is in good health.
“The Bank of England is in the nice position, unlike other central banks, of having a level of surety in the data it is seeing, when setting policy. With inflation playing ball as well, the path to lower interest rates looks to be set, the timing of the cuts is now the focus.”
ICAEW economics director Suren Thiru added: “The UK’s strong second quarter owes more to temporary momentum from the large recent falls in inflation and a boost to consumer spending from events like Euro 2024 than from a meaningful improvement in the UK’s underlying growth trajectory.
“These strong second quarter growth figures may delay the next UK interest rate cut by giving those rate setters still worried about domestic price pressures enough assurances over the strength of the economy to hold off relaxing policy.”
