The Bank of England will not cut interest rates in August despite inflation remaining at its target level of 2 per cent, a panel of leading economists have said.
The experts told i the Bank of England’s Monetary Policy Committee (MPC) will now be unlikely to cut rates until September, in what will come as a blow to mortgage holders.
Willem Buiter, a former member of the MPC, told i: “I expect the MPC will keep the rate unchanged on 1 August. If we get another month of headline inflation in the low 2s, we could see the first 25 basis points cut on 19 September.”
A cut of 25 basis points would take the Bank of England interest rate back down to 5 per cent for the first time in a year. It has been held at 5.25 per cent since August 2023.
Although inflation remained at the Bank’s target of 2 per cent on Wednesday, underlying price rises remained high.
Core inflation, which excludes volatile measures, such as food and energy prices, stayed at 3.5 per cent, the same as in May. Services inflation also remained at 5.7 per cent.
Prior to the inflation figures being released, markets had priced in a roughly 50-50 chance that the Bank would vote for an August base rate cut.
But now, economists who were previously predicting a cut next month have scaled back their forecasts.
Their predictions will not be welcomed by the new Labour Government, amid hopes that an interest rate cut from the 16-year high of 5.25 per cent would lead to lower mortgage rates, easing financial pressures on families.
Mortgage rates are heavily linked to the Bank of England interest rate, which means a hold in August will spell bad news for households.
Those on tracker or standard variable rate mortgages are immediately affected by interest rate changes, but some 81 per cent of homeowners are on fixed-rate mortgages, that tend to work on long-term predictions for where the base rate will go.
These rates have dropped in recent weeks, although experts previously said they could plateau without a cut to the base rate. Those nearing the end of their fixed term fear a jump in their monthly payments if the base rate does not drop.
Four of five economists i spoke to, including two former MPC members, said they expected the rate to remain unchanged when the MPC next meets on Thursday 1 August, although some said they would personally cut rates sooner.
A further expert said he would possibly switch his forecast to September, depending on what new data on wages – released on Thursday – showed.
David Blanchflower, another ex-MPC member, said he would “assume” the MPC would hold rates next month, but added that he would personally have cut them months ago, and would vote for a reduction from 5.25 per cent to 4.75 per cent if he were now on the MPC .
Paul Dales, chief UK economist at Capital Economics, said that although his company was currently forecasting a cut in August, he expected this to change to September unless the wage data released on Thursday morning was “very weak”.
Annual growth in regular earnings was 6 per cent last time the data was released. If it remains as high as that this week, it is likely to encourage MPC members to vote for an interest rate hold at August’s meeting, as high wage growth often feeds high inflation.
What economists expect the Bank of England to do in August
- Willem Buiter, a former member of the MPC from 1997 until 2000, said: “All the key consumer inflation rates in June are unchanged from May. Inflation at 2 per cent is encouraging. However, core inflation remains well above target at 3.5 per cent. I expect the MPC will keep the rate unchanged on 1 August. If we get another month of headline inflation in the low 2s, we could see the first 25 basis points cut on 19 September. I would wait for a material improvement in the core inflation rates before I would vote to cut.”
- David Blanchflower, a former member of the MPC from 2006 until 2009, said: “It seems hard not to believe there should be cuts in rates with inflation at target. I would vote for a 50 basis point cut. I assume [the MPC] will hold.”
- Samuel Miley, managing economist and forecasting lead at the Centre for Economics and Business Research, said: “Our previous forecast, produced in June, was for a cut in August. With developments this month, I personally now see another hold as the more likely outcome. This has yet to be formalised in a forecast review, however.”
- Paul Dales, chief UK economist at Capital Economics, said: “Thursday’s release of the wage growth figures for May will shed a bit more light. But, at the moment, we’re becoming even less confident in our existing forecast that the Bank of England will cut interest rates from 5.25 per cent to 5 per cent at the next policy meeting in August. We are still officially forecasting August. But unless tomorrow’s labour market release is very weak, I suspect we’ll shift to the first cut being in September.”
- Edward Jones, professor of economics at Bangor University, said: “It’s a difficult call as I’ve always thought the first cut would be August, but the gap between services inflation and overall inflation is large. The only slight element running counter to that is Taylor Swift’s inflation impact. It is funny that a popstar can feature in economic discussions, but the impact on services inflation caused a short-term blip, which should iron out. If I have to be practical, I have to expect a September cut though.”