Financial experts are warning that the increase in the headline rate of inflation from 2.0% to 2.2% might be enough to shatter hopes of a Bank of England rate cut next month.

Figures out yesterday showed that consumer price inflation hit 2.2% in July, back above the Bank of England’s 2.0% inflation target, but so-called core inflation fell to 3.3% from 3.5%, while services inflation eased much more than expected to 5.2% from 5.7%.

But Richard Pike of the lending company Pheobus says: “In their August Monetary Policy Report, the Bank of England did predict a slight uplift in inflation, and advised a cautious approach to further rate cuts. It was already a close 5-4 vote  in August so, with rising inflation, it will be a surprise if they don’t stick at 5% come September.

“It’s a real balancing act. On the one hand, you have economists warning of increasing inflationary pressures in the coming months. On the other hand, unemployment is expected to rise, which would put more pressure on the economy when it’s just starting to recover from the 2023 recession.”

Sarah Coles, personal finance head at Hargreaves Lansdown consultancy, says the Bank of England was expecting a rise in inflation, but it nonetheless is a blow to the hope for further base rate cuts soon. 

She says: “The rate is unlikely to be cut during the month either, given the increase in inflation came on the back of unemployment figures that revealed the jobs market is looking healthier than expected, and wage rises continue to outstrip inflation. The market is still expecting at least one more rate cut before the end of the year – possibly two – but this is by no means nailed on.

“… Mortgage borrowers on tracker rates are likely to have to wait for the next cut in their monthly payments. It was always going to take longer for rates to unwind than they did to build, but those whose finances are stretched to breaking point could be forgiven for getting increasingly impatient.

“For those looking for a new fixed rate, or with a remortgage looming, the news is better. Mortgage rates have eased in recent weeks. Moneyfacts figures show the average two-year fixed rate mortgage is now at 5.67% – having dropped from a recent high of 5.97% at the end of June. They may well drift further south in the coming weeks, but expected rate cuts have already been largely priced in, so we can’t look forward to any major falls just yet.”

And mortgage experts speaking to the Newspage agency echo the concerns.

Ranald Mitchell, director at Charwin Mortgages, comments: While an interest rate cut in September may be less likely, lender competition with mortgage rates should support borrower demand and maintain resilience in the property market.”

Ben Perks, managing director at Orchard Financial Advisers, states: “A base rate reduction in September was always unlikely, but now seems totally out the window. It is unnerving to see inflation on the rise again, but an uptick to 2.2% is better than anticipated. No need for panic stations yet. This data should have very little impact on swap rates and the interest rates available to borrowers should continue to trickle downwards. Core inflation could ride to the rescue.”

And Riz Malik, director at R3 Mortgages, sees it this way: “While no one expected inflation to stay at 2%, the current data doesn’t point to a rate cut at the September meeting. With no meeting in October, November could still present an opportunity for the second base rate cut of the year.”