THE Institute of Directors declared yesterday that a rise in UK interest rates next month was “not set in stone”, after annual UK inflation defied economists’ predictions of an increase by staying stuck at 2.4 per cent in June.
Economists had forecast annual UK consumer prices index inflation would have risen to 2.6% last month, having come in at 2.4% in April and May. The lower-than-expected June rate, coupled with elevated Brexit uncertainty, fuelled debate over the prospect of an interest-rate rise from the Bank of England’s Monetary Policy Committee at its August meeting.
Annual CPI inflation remained static even though petrol prices jumped by 2.7 pence per litre between May and June, in contrast to a 1.1p-a-litre fall between the same two months of last year.
Clothing prices tumbled by 2.3% between May and June. This was the sharpest drop in clothing prices between these two months in any year since 2012. Between May and June 2017, clothing prices fell 1.1%.
Tej Parikh, senior economist at the Institute of Directors, said: “The stickiness in prices will reduce pressure on the Bank of England to hike interest rates in August. The decision is certainly not set in stone, particularly as wage growth is a key component of inflation, and the recent data shows little promise of a sustained rise in salaries.”
Ben Brettell, senior economist at stockbroker Hargreaves Lansdown, noted that markets had ahead of the inflation data “been pricing in around an 80% chance the Bank would lift borrowing costs in August”.
The Bank raised UK base rates by a quarter-point from a record low of 0.25% last November.
Mr Brettell said the “inflation data combined with…lacklustre wage growth figures could force policy-makers into a re-think”.
He added: “There’s certainly a case for higher rates as soon as next month. But I think the decision is more finely balanced than the markets would have you believe. The Bank will be mindful of Brexit-related uncertainty, and may decide to wait for confirmation that the weak first-quarter growth figure was just a blip before raising borrowing costs.”
Howard Archer, chief economic adviser to the EY ITEM Club think-tank, said: “While [the inflation] release is unlikely to prevent the MPC from hiking interest rates in August, it does further undermine a narrative about a tighter labour market driving up wages and prices. This is likely to mean a slow pace of rate hikes.”
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