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August rate hike ‘less of a dead cert’ after surprise inflation figures

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18/07/2018
An interest rate rise in August is in doubt after inflation unexpectedly undershot forecasts last month.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in June, unchanged from May, according to figures from the Office for National Statistics (ONS).

Economists had expected higher energy prices to push the rate up to 2.6%, but this was offset by falling prices for clothes and games.

Faster rising prices would have given the Bank of England (BoE) more of a motivation to increase interest rates next month, but today’s inflation data combined with yesterday’s lacklustre wage growth figures could force policymakers into a rethink.

Markets had been pricing in an 80% chance the BoE would lift borrowing costs in August.

The pound dropped sharply on today’s news, losing around three-quarters of a cent against the dollar as traders revised their bets on an August rate rise.

Tom Stevenson, investment director for personal investing at Fidelity International, said it looks odds-on that the BoE will hold fire yet again on a rate rise.

“The Bank of England will be mindful of the deepening economic and political uncertainty as well as the potential for inflation to soften again as petrol price hikes drop out of the comparisons,” he said.

“August’s expected rate hike is, therefore, even less of a dead cert than it was before today’s surprise inflation print. It is now entirely possible that the Bank will delay until November or even next year.”

Ben Brettell, senior economist, Hargreaves Lansdown, said: “There’s certainly a case for higher rates as soon as next month. But I think the decision is more finely balanced than the markets would have you believe. The Bank will be mindful of Brexit-related uncertainty, and may decide to wait for confirmation that the weak first-quarter growth figure was just a blip before raising borrowing costs.”

This is the third month in a row that inflation has stalled at 2.4% and the 17th consecutive month it has exceeded the government’s target of 2%.

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