Will Bank of England finally cut interest rates next month? Experts give their

On Jul 22, 2024

Millions of mortgage borrowers will be hoping for an interest rate cut, with the current base rate of 5.25% at the highest level for 16 years

The Bank of England will make its next interest rates decision on August 1(Getty Images/Wavebreak Media)

UK inflation has finally fallen to the Bank of England target of 2% – but is this enough to finally see interest rates cut?

The Consumer Price Index (CPI) measure of inflation fell to 2% in May, its lowest level in three years – but inflation remains sticky and stayed at this level in June, the latest reading to date. Bank of England governor Andrew Bailey has previously warned that its Monetary Policy Committee (MPC) will only cut interest rates once they’re confident inflation will remain under control – so even though inflation has come down, they need to be sure it will stay down.

The Bank has already said it predicts inflation is likely to rise a little above 2% this year. But CPI data isn’t the only factor the MPC uses when it votes on whether to cut interest rates. It also looks at wage growth, with the theory that if pay rises too sharply, businesses may put up prices for customers to offset the increased costs of higher wages for staff.

Wages grew at an annual pace of 5.7% in the three months to May, its slowest rate in almost two years, but still well above CPI inflation. The Bank also considers “core inflation” when making a decision on interest rates. Core inflation doesn’t include food or energy prices and was 3.5% in June, unchanged from May.

Meanwhile, some parts of the economy, like the services sector which includes businesses such as restaurants and hairdressers, are still seeing significant price rises. All this combined raises questions as to which way the Bank decides to act when the MPC next meets on August 1.

Millions of mortgage borrowers will be hoping for an interest rate cut, with the current base rate of 5.25% at the highest level for 16 years. But a poll by Reuters shows investors now predict there is a 35% chance the Bank will announce a rate cut, down from just under 50% before the latest inflation data was released.

Novo Constare, CEO and co-founder of Indeed Flex, said: “A rate cut is a possibility next month, but could still be premature while wage growth remains strong and prices in the UK’s dominant services sector continue to rise. However, there is optimism that interest rates will eventually fall from their 16-year high this year, providing a much-needed boost to businesses and enhancing job creation, which would be a feather in the cap of Sir Keir Starmer.”

George Sweeney (DipFA), investing expert at personal finance site Finder.com added: “The recent inflation data coupled with the latest wage growth figures still may not be enough for the Bank of England (BoE) to start lowering interest rates. Higher for longer could still be in play and base rate cuts may start happening later than markets first predicted.”