Traders cut odds on summer interest rate cut amid ‘uncomfortable’ inflation

Money markets indicated the chances of an interest rate cut in August were lower than 50pc
Money markets indicated the chances of an interest rate cut in August were lower than 50pc - NEIL HALL/EPA-EFE/Shutterstock
Szu Ping Chan
52 min read

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Investors have slashed their bets on a summer rate cut after the Bank of England’s chief economist warned inflation remained uncomfortably high.

Huw Pill said cutting rates from their current level of 5.25pc was still a question of “when-rather-than-if” amid signs that price pressures were now “contained”.

However, Mr Pill warned that underlying inflation was proving “persistent” and possibly permanently harder to control following a series of post-pandemic economic shocks.

The pound rose against the dollar and investors briefly pared back bets on an August reduction to less than 50pc following his remarks, having previously assumed a reduction at the Monetary Policy Committee’s (MPC’s) next meeting in August was more likely than not.

It comes after inflation fell back to the Bank of England’s 2pc target in May.

The MPC’s nine rate setters voted 7-2 to keep interest rates at a 16-year high in June in what it described as a “finely balanced” decision.

But in a blow to Sir Keir Starmer’s hopes that borrowing costs will start falling before Autumn, Mr Pill said it had become harder to assess the strength of the economy in recent months, adding that price rises in Britain’s most dominant services sector were showing “uncomfortable strength”.

Catherine Mann, another top Bank official, also played down the prospect of an August cut as she warned pay rises remained too high.

Speaking at a separate conference, Ms Mann said the rising cost of services such as airfares and restaurant bills together with ongoing “labour market tightness” meant wages were still increasing at a pace that was not consistent with the Bank’s 2pc inflation target.

Ms Mann also described the drop in inflation back to 2pc in May as “touch and go” as she warned price rises were likely to climb again in the second half of the year.

“Until I see some sustained deceleration in services prices, I’m really not in a position [to cut rates],” she said.

Mr Pill said fresh jobs and prices data this month were likely to paint a clearer picture of the economic outlook.

Policymakers believe price rises will pick up again in the coming months as energy costs stabilise.

Services inflation, which measures the price of haircuts, airfares and concert tickets, is still rising at an annual rate of 5.7pc.

Speaking at Asia House in London, Mr Pill said: “It is hard to dispute the case that inflation persistence in the UK continues to prove – well – persistent.”

He added: “At annual rates still not far from 6pc, annual services price inflation and wage growth continue to point to an uncomfortable strength in those underlying inflation dynamics.

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