The recent rise in the UK inflation rate to 2.2% could impact the timing and likelihood of interest rate cuts, but it may not entirely stop them from happening. Here’s why:

Inflation Remains Close to Target: While inflation ticked up slightly, it remains relatively close to the Bank of England’s 2% target. The Bank had anticipated a peak of around 2.75%, meaning the current rise isn’t seen as drastically high or unmanageable. As long as inflation remains within a range the Bank views as acceptable, it may still consider rate cuts if other economic conditions, like slower growth or easing wage pressures, support such a move.

Core Inflation and Services Sector: Core inflation, which excludes volatile components like food and energy, has actually decreased to 3.3% from 3.5%, and inflation in the services sector has also eased. These are important metrics for the Bank of England as they signal underlying inflationary pressures are cooling. If this trend continues, it could give the Bank more room to lower rates.

Market Expectations: Despite the slight rise in headline inflation, market participants are still pricing in a reasonable probability of rate cuts. Before the inflation data, markets estimated a 36% chance of a rate cut in September, which rose to 45% after the data was released. This shows that investors are still betting on a cut, albeit with some caution. Additionally, markets are expecting two rate cuts by the end of the year.

Broader Economic Considerations: Beyond inflation, the Bank of England also considers other factors such as economic growth, unemployment, and wage growth. If the broader economy shows signs of slowing or consumer demand weakens, the Bank might prioritize supporting the economy through lower interest rates, even if inflation remains slightly above target.

Inflation Outlook: The Bank of England has indicated that it expects inflation to peak soon and then start falling. If this outlook holds, the central bank may feel more confident in cutting rates later in the year, assuming inflation starts to ease after its expected peak.

In summary, the recent inflation rise could delay or temper the size of interest rate cuts, but it is unlikely to completely halt them, especially if inflation moderates and other economic indicators suggest a need for easing monetary policy.

Source: Property Notify