Interest rates – live: Rates hit 15-year high as ‘mounting cash pressures’ push Wilko to brink of collapse

UK inflation is expected to drop below 5 per cent in the final few months of 2023, allowing Rishi Sunak to meet his target of halving inflation by the end of the year, according to new projections from the Bank of England.

The Bank predicted that Consumer Prices Index (CPI) inflation will fall to 4.9 per cent in the final quarter and remain above 2 per cent until mid-2025.

The recent easing of price rises has been driven largely by a fall in international energy prices, which are set to reduce the average UK household’s energy bill to below £2,000 a year by October.

The Bank added in its report: “Food price inflation, which has a particularly large impact on the living costs of lower-income families due to it making up a larger share of these families’ budgets, remains extremely high.”

But it expects annual food inflation to fall to around 10 per ent by the end of the year as lower input prices make their way down the supply chain.

Trade union Unite has slammed the interest rate hike as the “wrong decision once more”, reports our political correspondent Archie Mitchell.

General secretary Sharon Graham said inflation is high not because of pay increases but “rampant profiteering” and “greedflation”.

She said: “There is no doubt – workers and their families are continuing to pay the price in this cost-of-living crisis.

“The economy is not working for everyday people and we need to make different choices. Until profiteering is tackled there can be no respite from continuing inflation.”

Commenting on the decision to hike interest rates by a further quarter-point to 5.25 per cent, Andrew Bailey, Governor of the Bank of England said: “Inflation is falling and that’s good news.

“We know that inflation hits the least well off hardest and we need to make absolutely sure that it falls all the way back to the 2 per cent target. That’s why we’ve raised rates to 5.25 per cent today.”

The Bank of England has hiked interest rates for a 14th consecutive time, further raising the cost of borrowing in its bid to tame stubborn inflation.

The central bank’s Monetary Policy Committee increased its base rate by a further 0.25 points to 5.25 per cent on Thursday, the highest level since February 2008.

It follows a shock rise of 0.5 per cent in June, which has piled pressure on mortgage holders and the housing market.

Economists, however, are eyeing an end to the current cycle of rate increases, after the latest inflation figures suggested that the price rises eating into household budgets were falling faster than expected.

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The UK’s economy is set to “flatline at best” after the dominant services sector suffered its most sluggish growth for six months in July, experts warned.

As firms were rocked by the impact of the rising cost of living and spiralling intrerest, the widely-watched S&P Global/CIPS UK services PMI survey showed a reading of 51.5 last month, down from 53.7 in June.

A reading above 50 indicates growth in the sector, which dominates the British economy and covers retail, hospitality and business and finance. But the sharp dip was the third consecutive slowdown in growth, pointing to potential stagnation in the economy.

It came just days after a similar survey showed bosses in manufacturing sector were the gloomiest they have been since the height of the first Covid lockdown.

Our political correspondent Archie Mitchell has the full report:

There is “still work to be done” for the Bank of England, an analyst has said, ahead of today’s expected interest rate rise.

William Marsters, financial markets expert at Saxo, said: “The Bank of England is expected to announce yet another interest rate rise today as the UK continues to grapple with high levels of inflation. From the current level of 5 per cent, most are expecting a lift of 0.25 per cent, but another 0.5 per cent increase can’t be ruled out.

“With inflation decelerating in Europe and the US, it is speculated that those Central Banks may be approaching the end of their hiking cycle signalling light at the end of the tunnel. The UK inflation figures also fell last month, but Britons continue to experience the highest inflation across the G7 economies. So, some argue that this macroeconomic backdrop calls for greater tightening.

“Three large UK banks announced they would cut mortgage rates this week on the back of last month’s reduced inflation numbers. This gives homeowners an element of hope after some data showed this week has seen the fastest drop in house prices for 14 years.”

“There is still work to be done from the BoE, and the government maintains its promise to cut inflation in half this year. The policy move today, and any commentary will be closely watched by investors looking for clues on future policy, and also by consumers who are struggling with the cost of living crisis.”

A housebuilding company has said there has been “some pause” on prospective homeowners buying properties amid an increase in mortgage rates.

Peter Truscott, the chief executive of Crest Nicholson, was asked on Radio 4’s Today programme if demand for housing is falling as interest rates rise.

He said: “Demand still remains very strong in terms of clicks onto the website, people that are interested in buying homes, but not surprisingly, there has been some pause in terms of people actually coming in and reserving homes.

“I think a lot of people are standing on the sidelines. The market is broadly as we expected it to be following the the dislocation at the back end of last year and it’s tending to be volumes which are taking the strain rather than price.

“There is a little bit of gentle downward pressure on price, but it’s really volumes that are taking the strain.”

Money markets could even reduce their rates if the Bank of England signals that core inflation is stabilising and interest rates are close to their peak, an analyst has suggested.

Speaking to BBC Radio 4’s Today programme, Jane Foley, head of FX strategy at Rabobank, said the costs of fixed-rate mortgage deals “are more tied to money market rates which factor in expectations of where rates will be in two years or one year etc”.

If the Bank indicates later today that core inflation is stabilising, Ms Foley said, then “money market rates may not move, they may even come down a bit” – reducing the cost of fixed-rate mortgage deals.

A further interest rate rise would risk damaging the UK’s fragile economy and is unnecessary to tackle inflation, a shadow committee of economists organised by the right-wing Institute of Economic Affairs think-tank has said.

Having met once a month since 1997 to shadow the Bank of England’s Monetary Policy Committee, the group voted eight to one to keep the base rate at 5 per cent, with one member voting for a half-point increase to 5.5 per cent to prevent inflation from “becoming embedded in the economy”.

Trevor Williams, the group’s chair and former chief economist at Lloyds Bank, said: “It will take some time for previous rate rises and falling global commodity prices to feed into lower inflation. But, in the meantime, further rate rises by the Bank of England are unnecessary and could do some economic damage without lowering inflation any faster.

“The UK economy is on the precipice of a sharper slowdown. There has already been a contraction in the money supply, with less liquidly available for loans, lower house price inflation, and slowing economic activity, as shown in the sharp fall in the Purchasing Managers’ Index (PMI) for manufacturing.”

In his latest column, our chief political commentator John Rentoul writes:

The prime minister had obviously learnt from his tetchy clash with a BBC radio presenter on Monday, and came to his longer interrogation by members of the public on Nick Ferrari’s show on LBC determined to be polite, cheerful and thoroughly reasonable.

But Rishi Sunak managed to keep the financial jargon to a minimum (talking of when Jack’s mortgage “comes up for repricing”) and turned his replies effortlessly to the fundamental argument that “the best way to help is to bring inflation down”.

The prime minister can’t talk the economy down, obviously. But given the Bank of England is almost certain to raise interest rates yet again, the battle against inflation is not one that Sunak is currently winning. To be as optimistic as he is risks sounding delusional and voters won’t thank him for not levelling with them.