Experts from the Hargreaves Lansdown business consultancy warn that interest rate cuts are off the agenda until 2026.
They warn that inflation is expected to rise from 3.8% in July to hit a peak of 4% in September, so we may well see it increase in August – the figure for last month will come out this week.
And they add that the market expects UK interest rates to be held at 4% next week – with no cut expected this side of Christmas.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, comments: “With food and grocery prices still on the boil there’s not likely to have been much cooling off. As people ringfence budgets for small treats, spending on entertainment, holidays and favourite foods is likely to have kept upwards pressure on the Consumer Prices Index.
“Retail sales figures show there was a more upbeat pattern of spending later in the summer, particularly for non-essential items. The broader rise we’ve seen in services inflation, in particular, is an ongoing concern for Bank of England policymakers.
“Some will worry that the persistent increase in everyday prices will propel more higher wage demands and make inflation harder to cool.
“Inflation is expected to peak at 4% this month, before starting a downwards drift. Even though we’re expecting bad news from the employment market, with every chance of more weakness everywhere from unemployment to vacancies, the Bank isn’t keen to cut at a time when inflation remains so stubborn.”
She continues: “Another reduction is not fully priced in by financial markets until March. This is likely to keep gilt yields higher, and cause continued headaches for the government, given it means borrowing costs stay elevated, keeping the public finances in a more fragile state.”
And Sarah Coles, head of personal finance at the consultancy, adds: “Fixed mortgage deals have been drifting gradually down for some time, with the average 2-year fixed rate falling from 5.2% four months ago to less than 5% (Moneyfacts).
“They’re not going anywhere fast, and last month’s cut didn’t noticeably speed things up. Lenders were keen not to go too far or too fast, in case people who had already agreed a rate abandoned it in favour of a cheaper one.”
