Debate rages over interest rate rises

Debate is raging over whether there will be a 15th successive interest rate rise when the Bank of England’s monetary policy committee meets towards the end of next month.

The debate follows a flurry of figures about the UK economy.

Inflation idropped to 6.8 per cent in the year to July from 7.9 per cent in June, according to the Office for National Statistics. This is the second month in a row that the rate of inflation has dropped sharply and it is now at a 15-month low.

However, although the latest figure was driven by a reduction in the energy price cap and food costs rising less rapidly - particularly milk, bread and cereals - core inflation (stripping out energy and food) remains relatively high.

The inflation news follows data showing that wages grew at a record annual pace in the April to June period: regular pay rose by 7.8 per cent, the highest annual growth rate since comparable records began in 2001.

Julian Jessop, economics fellow at the free market think tank the Institute of Economic Affairs, says: “The inflation data shows a welcome fall in the headline rate, but core inflation that excludes food and energy remains stuck at 6.9 per cent. The headline rate is also likely to tick up in August, reflecting higher fuel and alcohol prices, some unhelpful base effects, and the continued strength of the labour market.

“There are still plenty of reasons to expect inflation to tumble over the rest of the year, notably the sharp slowdown in money and credit growth. Rising unemployment and falling vacancies suggest that wage pressures will soon peak too.

“Unfortunately, the Bank of England continues to look backwards at the headline data over the last month or two, rather than pause to assess the impact of the substantial tightening in policy that is already in place. This makes another unnecessary interest rate increase more likely.”

Nicholas Mendes from the respected mortgage broker John Charcol adds: “UK inflation remains higher compared to other nations and above the bank of England target of 2.0 per cent. Following [the inflation] announcement markets are expected to remain stable with no sudden knee jerk reactions that we have experienced previously.

“Prior to this announcement markets had priced in a base rate rise peak of 6.0 per cent which means we are certain to see a further rise of 0.25 per cent in September regardless of the inflationary data, meaning a 15^th base rate increase.”

However, some feel there is enough scope for the Bank to stop further rises.

Kate Steere, deputy editor and housing expert at personal finance comparison site Finder, says: “I’m hopeful this fall in inflation could lead the Bank of England to pause its base rate hikes at the next Bank of England monetary policy committee meeting. This could help provoke a mortgage price war amongst the big providers, resulting in some more competitive rate options finally hitting the market. This would give some much-needed relief to prospective buyers and mortgage holders in the UK.”

And Ben Thompson, deputy chief executive of the Mortgage Advice Bureau, adds: “Inflation being below average wage growth could mark a turning point in the cost of living crisis, and potentially signal good news for mortgage customers, with lenders already reducing their rates and more manageable payments becoming a reality.”

We're excited to announce that we're working on building a shiny new website for readers of Landlord Today! As part of this process, commenting on articles will be temporarily disabled. We look forward to sharing our new and improved Landlord Today website with you shortly!