Interest rates: Big rise less likely after inflation surprise

Adapted from a BBC article by Daniel Thomas , Faisal Islam & Dharshini David

Interest rates are predicted to rise less sharply after the UK saw a surprise drop in inflation in June.

The Bank of England has raised rates 13 times since December 2021 to try to cool soaring price rises, driving up borrowing costs for millions.

Experts say it is now under less pressure to act after inflation slowed to 7.9% in June, down from 8.7% the previous month. It means UK inflation has dropped to its lowest level in more than a year.

Falling fuel prices contributed to the slowdown in June, while food prices are rising less quickly, according to the Office for National Statistics (ONS) which publishes the figures.

However, the UK's inflation rate remains almost four times higher than the Bank's official 2% target - and far above other developed countries. In the US, inflation is 3%, and in the eurozone it is 5.5%.

"It is a large drop [in the UK] but let's not forget that last month we saw no change at all in headline inflation so in some ways what we are seeing this morning is catching up with the falls we've seen in other similar countries," ONS chief economist Grant Fitzner told the BBC's Today Programme.

Prices of food, energy and services have shot up since last year, squeezing household incomes.

To tackle the problem the Bank has raised interest rates from near zero to their current level of 5%. The idea is that by making borrowing more expensive, consumers will spend less and price rises will cool.

Rising interest rates have also driven up mortgage borrowing costs to their highest level in 15 years, leaving millions of homeowners facing higher monthly repayments.

On Wednesday 19 July, the average two-year fixed residential mortgage rate crept up to 6.81%, while the five-year rate was 6.33%. This time last year rates were closer to 3%.

With inflation finally falling by more than expected, economists are scaling down their expectations of immediate interest rate rises - although they still think there are more in store.



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