Despite the positive news that inflation has reached the 2% target the Bank of England is set to keep interest rates at 5.25%.
In May the Consumer Prices Index (CPI) dropped to 2% compared to 2.3% in April, according to figures by the Office for National Statistics (ONS).
On Thursday the Bank of England will meet to vote either holding or lowering interest rates.
Thomas Pugh, economist at RSM UK, said, “Services inflation, which is a better measure of underlying price pressures in the economy than headline inflation, missed expectations again, only slowing to 5.7% against expectations of 5.5%.
This will raise concerns on the MPC that underlying price pressures in the economy aren’t slowing as quickly as expected and makes an August interest rate cut less likely.
Still, the economist is not ruling out an August cut. He added: “We expect inflation to fall below 2% in June, setting the stage for the MPC to cut interest rates in August.
“Inflation is likely to average a little above 2% for the rest of the year giving the Bank plenty of room to deliver rate cuts.
“Our base case is still for interest rates to finish the year at 4.5%, but the risks have clearly shifted to fewer cuts this year.”
James Smith, research director at the Resolution Foundation said, “And while headline inflation is back to normal levels, domestically-driven services-price inflation remains elevated. This inflation will worry the Bank of England, and may give pause for thought when it comes to cutting interest rates.”
Analysts at AJ Bell said, “Governor Andrew Bailey and his colleagues on the MPC may not wish to act in any way that could be seen as favouring one political party over another in the run-up to July’s poll.
