LONDON — U.K. inflation has fallen unexpectedly to its lowest level since Russia invaded Ukraine, raising hopes that the Bank of England’s widely expected interest rate increase Thursday will be its last — for now.
The Office for National Statistics said Wednesday that price rises, as measured by the consumer price index, moderated to 6.7% in the year to August, down from 6.8% in July. The decline took inflation to its lowest level since February 2022, when Russia’s invasion of Ukraine led to soaring energy and food prices.
The agency credited lower hotel and airfare costs and a moderation in food price rises for the decline. That helped offset an increase in energy costs on the back of higher crude oil prices.
The decline was unexpected. Most analysts had expected inflation to increase to around 7% in light of the increase in prices at the pump.
Though the surprise drop was encouraging, inflation is still way above the Bank of England’s target rate of 2% and higher than any other Group of Seven major advanced economy.
As a result, the consensus in financial markets is that the central bank will raise its main borrowing rate once again Thursday by a quarter of a percentage point to a near 16-year high of 5.5%.
However, many economists said it’s not inconceivable that the bank will keep interest rates unchanged or at the very least indicate that Thursday’s anticipated increase will be the last for now. That would be a relief to millions of homeowners facing higher mortgage rates.
“This will strengthen the case that the bank’s 14 consecutive interest rate rises are now showing clear signs of putting downward pressure on inflation, and that its rate-rising cycle will soon end,” said James Smith, research director at the Resolution Foundation think tank.
But for many U.K. homeowners, the pain has yet to hit. Unlike in the U.S., for example, most homeowners in Britain lock in mortgage rates for only a few years, so those whose deals expire soon know that they face much higher borrowing costs in light of the sharp rise in interest rates over the past couple of years.
The European Central Bank, which sets interest rates for the 20 countries that use the euro currency, last week hinted that its 10th straight hike could be its last. The U.S. Federal Reserve also is expected to hit the pause button Wednesday.
Like other central banks around the world, the Bank of England has raised interest rates aggressively from near zero as it seeks to counter price rises first stoked by supply chain issues during the coronavirus pandemic and subsequently Russia’s invasion of Ukraine. Inflation hit a peak of 11.1% in October 2022.
Source: abc news
