Money blog: Interest rate cut blow as inflation drops less than expected (2024)

Top news
  • Inflation falls to 2.3% - down from 3.2% in March
  • Markets now not expecting interest rate cut in June
  • Ed Conway analysis: Peer through numbers and they look considerably more inflationary than you might expect
  • Ian King analysis: Do Sunak and Hunt deserve any credit at all for bringing down inflation?
  • Cazoo goes into administration
  • House rises grow in every region - apart from two
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3% interest rates next year now look less likely - economist

As we've been discussing, today's inflation data could set back interest rate cuts - with the Bank of England having stated it needs evidence inflation can hit and stay at the 2% target before it acts.

Headline inflation is now within touching distance of the target - but 2.3% wasn't as low as expected and core inflation, which strips out the volatile elements, is still at 3.9%.

Paul Dales, chief UK economist at Capital Economics, said the smaller-than-expected fall in inflation makes a June rate cut "unlikely" and "casts some doubt over August too".

Capital Economics had forecasted that rates would fall from 5.25% now to 3% next year, but Mr Dales says this now looks "more challenging".

He said today's data would have been a "blow" for the Bank of England and Rishi Sunak, despite inflation being closer to the 2% target than it has been for three years.

He pointed out that restaurant and hotel inflation rose from 5.8% to 6%, while cultural services inflation (including concerts and cinemas) rose from 5.4% to 8.3%.

"Even though there is still a wages and a CPI release to go before the Bank of England meeting on 20 June, it feels as though a cut then now seems very unlikely," Mr Dales said.

"Our forecast is that lower energy prices and a faster fading of persistence (due to the previous weakness of the economy) will mean inflation falls below 2% in the coming months and perhaps even close to 1% later this year."

"If so, the BoE may eventually end up cutting interest rates from 5.25% now to 3.00% next year."

However, he said he was "more worried" about that forecast now and it might not happen as soon.


Cazoo goes into administration

As billed by our City editor Mark Kleinman yesterday, the used car business has gone into administration - just three years after listing in New York at a valuation of $8bn.

Cazoo had warned earlier this month it might need to file for administration, and has now appointed restructuring advisers at Teneo to handle the insolvency.

The business was launched in 2018 as an online retailer and supplier of used cars.

More recently it had become an advertising marketplace similar to Auto Trader, prompting 728 job cuts.

It now has about 200 employees.

The business, which invested aggressively in marketing, had struggled to turn a profit and had made losses before tax of £525.5m in 2022.

Teneo said almost 100 car dealers had expressed an interest in trading on its marketing platform and that administrators hoped to conclude a sale in the coming weeks.


House rises grow in every region - apart from two

We frequently report on unofficial house price data from the likes of Nationwide, Halifax, Zoopla and Rightmove - the official data lags behind a month or two, but we now have it for the year to March.

Average UK house prices increased by 1.8% in that time period, Office for National Statistics (ONS) figures show.

This left the average price at £283,000.

It represented a recovery after house prices fell by 0.2% in the 12 months to February.

Meanwhile, private rents increased by 8.9% in the 12 months to April.

ONS chief economist Grant Fitzner said: "Average UK house prices grew over the year for the first time since last summer.

"House prices saw an annual rise in every nation and region, except London and the South East, with Scotland seeing the fastest annual growth.

"After two years of unprecedented and generally accelerating annual growth, private rental price rises showed tentative signs of easing.

"Most nations and English regions saw a slowdown, with a notable easing in London."


Stock market doesn't react well to inflation figure

By Sarah Taaffe-Maguire, business reporter

The London Stock market has not reacted well to a higher than expected inflation figure - 2.3%, rather than the 2.1% forecast. The FTSE 100 (Financial Times Stock Exchange index of most valuable companies on the exchange) fell 0.56% after the announcement.

There have been rises since that opening drop as morning trading wears on but not to the level of the close yesterday evening.

Leading the rally is Marks & Spencer with a sharp 8.77% share price after an already strong 18 months for the high street store. Today it reported a whopping annual profit rise of 58%.

The pound was up at a month high against the dollar this morning and now buys $1.2727. It was the same with sterling against euro as £1 buys €1.1732.


Analysis: Peer through the numbers and they look considerably more inflationary than you might have expected

Let's start with the good news. After nearly three years in which inflation was well above the Bank of England's 2% target, it is finally back into what might be considered "normal" levels.

Inflation is the rate at which prices are changing over the past year, and that annual rate dropped from 3.2% in March to 2.3% in April. But while it's down into "normal" territory, there are a few reasons for caution.

The first is that actually the annual rate was expected to fall even further: the consensus forecast among economists was for it to drop to 2.1%. The second is that when you peer through the numbers, they look considerably more inflationary than you might have expected.

Core inflation - which is what you get when you strip out volatile items like food and energy, is still rising by 3.9%, which was not just higher than the overall rate, but considerably higher than economists expected. Even more worryingly, as far as economists are concerned, was the fact that services inflation - which measures the changes in prices of everything from haircuts to legal services - barely fell at all, dropping from 6% to 5.9%. Economists had expected that number to be down at 5.4%.

All of which is to say, while the overall fall in the big number is reassuring, there is quite a lot in there which is not. Indeed, in financial markets, where investors are constantly betting on the likelihood of interest rate changes, there was an instant reaction. While, in the minutes before the inflation data was released, investors were putting a 50% probability on the Bank of England cutting interest rates at its next meeting in June, that probability dropped to just 14% after the inflation data.

But there's a deeper reason to be wary of declaring "mission accomplished" on the cost of living crisis today, which is that for most people, the crisis doesn't yet feel over in the slightest.

The thing to remember here is that inflation typically just measures the changes in prices over the past year. And over the past year specifically, prices are indeed up by only 2.3%. In large part that's because energy prices fell over that period.

However, as we all know, while energy prices might have fallen in the past year, they are still way higher than they were a few years ago. The same goes for overall prices. Indeed, look at the difference between price levels today and mid-2021, the beginning of the period of higher-than-normal inflation, and they're up by a whopping 20.5%.

Now, much of that is the consequence of higher energy prices following Russia's invasion of Ukraine. But the point is that we've had a step shift here. It's not as if prices have gone down, and while wages are now rising more rapidly than inflation, they haven't kept pace with prices - meaning we are all worse off.

Still, inflation is now back to normal levels. The Bank of England is still expected to cut interest rates - albeit not as quickly as previously anticipated. And the economy is out of recession. Things are getting better. But we're not quite out of the woods yet.


Hunt denies National Insurance cut was inflationary

We're now hearing from Chancellor Jeremy Hunt, who is asked whether government policies have helped keep inflation above the 2% target.

Mr Hunt said his two cuts to National Insurance were not "slightly inflationary", as the Bank of England previously suggested.

He said the Independent Office for Budget Responsibility had said the "impact was not inflationary".

Inflation falling less than expected in April - to 2.3% rather than 2.1% - has set back expectations for a June interest rate cut, with August now looking more likely.

Mr Hunt emphasised the Bank's previous confidence that we're entering a cutting phase.

"The precise timing is obviously something that we will all have to wait for," he told Burley, adding: "[Inflation is] very close to its target level now, it's returned to much more normal levels.

"And the Bank of England who decide these things independently, once they're confident that they have reached their target level and it's going to stay there, they can bring down interest rates.

"That's obviously good news for mortgage holders.

"But I think families will still be feeling quite bruised after the last couple of years, because although the inflation rate has gone down, prices are still higher than they were a year ago."

Mr Hunt also pointed to remarks by the International Monetary Fund yesterday, which said the UK's economy is due to grow faster than the likes of France in the next six years.


How does UK inflation compare with other countries?

Inflation has fallen sharply in the UK - so how does it compare to other countries?

The headline rate is now lower than the US, France, Germany and the Eurozone - but only slightly.

Unlike the other comparable countries, Germany saw its inflation figure rise in April to 2.4%, up from 2.3% in March.


What has driven the inflation drop?

Inflation has dropped to its lowest level since July 2021 - and there have been many contributing factors.

According to the Office for National Statistics, housing and household services, particularly gas and electricity, were the biggest downward contributor.

Alcohol and tobacco, food and non-alcoholic beverages, recreation and culture, and communication, also had a big impact - with price rises slowing.

However, there were some upward contributions as well, which stopped inflation edging even closing to the Bank of England's 2% target.

These came from restaurants and hotels, and miscellaneous goods and services.

Inflation falling doesn't mean prices are going down - just that they're rising less quickly.


Markets now not expecting interest rate cut in June

Markets had judged it pretty much 50/50 on whether the base rate would be cut in June - but those expectations have now fallen back.

Markets are pricing in an 84% chance of no change in the Bank of England's 20 June meeting.

An August cut is now seen as more likely.

The base rate stands at 5.25% - its highest level for 16 years.

The Bank has indicated it will only start cutting when it is clear inflation has reached, and can stay around, the target 2% figure.

Rates are kept high in order to tame inflation by squeezing the economy.


Analysis: Inflation figure is good - but is it good enough for an interest rate cut?

Ourdata and economics editor Ed Conway has been analysing the latest inflation data released by the Office for National Statistics.

He says while the 2.3% figure is down "sharply" from 3.2% in March, it's not as low as economists predicted.

Some had thought it might come down to 2%, while the Bank of England had expected it to land at 2.1%.

Conway says it's good news the figure is lower than it has been since July 2021, but 2.3% might not be enough to prompt a June base rate cut.

"There have been a lot of people out there thinking that maybe they are going to cut interest rates down from 5.25% as soon as next month," he explains.

"This figure to me suggests they may hold on for a little bit longer, maybe they'll wait until August."

He says the government will want to present the inflation figure as evidence the UK is going back to a "period of normality", but the key question is "do people feel better off now?"

He says people are still paying around 20% more than they were a couple of years ago.

Money blog: Interest rate cut blow as inflation drops less than expected (2024)


Does lowering interest rates decrease inflation? ›

When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.

Will the Federal Reserve cut interest rates in 2024? ›

The Federal Reserve isn't likely to lower interest rates in 2024. Elevated inflation, a resilient economy, and a still-strong, if softening labor market argue against the need for easing monetary policy, especially as these conditions are expected to persist through year end.

Will interest rates go down? ›

Home loan rates could remain flat

"With inflation readings coming in above the target 2% rate, we aren't likely to see rates come down in any significant way," says Luchaco.

How did rising interest rates affect Americans? ›

Stock prices fell when the Fed began raising rates, but have rebounded and are near a record. Home prices have continued rising in most of the country. The result is a growing divide. Fed data suggests that wealth for the upper half dipped after the Fed's initial rate increase in 2022, but is again setting records.

Who benefits from high interest rates? ›

The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.

What stocks to buy when interest rates fall? ›

Cyclical stock sectors

The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise.

Will mortgage rates ever go down to 3 again? ›

Lawrence Yun, chief economist at the National Association of Realtors, even told CNBC that he doesn't think mortgage rates will reach the 3% range again in his lifetime.

What is the interest rate forecast for the next 5 years? ›

Trading Economics offers a more optimistic outlook, predicting a rise to 5% in 2023 before falling to 4.25% in 2024 and 3.25% in 2025. This forecast is supported by Morningstar's analysis, which projects rates between 3.75% and 4%.

What happens when the Fed cuts interest rates? ›

When the Fed cuts rates, the objective is to stabilize prices (control inflation) and stimulate economic growth; as lowering finance costs can spur businesses and consumers to invest as well as borrow.

How many years until interest rates go back down? ›

The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025. Here's where mortgage interest rates are headed for the rest of the year and how that will impact the housing market as a whole.

Will mortgage rates drop in 2024? ›

As inflation comes down, mortgage rates will recede as well. Most major forecasts expect rates to go down later in 2024.

What is a good mortgage rate? ›

As of May 31, 2024, the average 30-year fixed mortgage rate is 7.11%, 20-year fixed mortgage rate is 6.94%, 15-year fixed mortgage rate is 6.29%, and 10-year fixed mortgage rate is 6.22%. Average rates for other loan types include 6.95% for an FHA 30-year fixed mortgage and 7.14% for a jumbo 30-year fixed mortgage.

Do banks make more money when interest rates rise? ›

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.

Does the government make money when interest rates rise? ›

But when the short-term rates the Fed pays rise sufficiently to make its interest expenses greater than its interest earnings, the Fed loses money. It stops sending interest earnings to the Treasury.

Who suffers when interest rates rise? ›

The losers. Bond-fund investors, borrowers, and certain industries feel the pinch as soon as rates move upward: Bond funds, which regularly buy and sell their underlying holdings, can experience losses in the net asset value in the short term due to the inverse relationship between rates and bond prices.

How to curb inflation? ›

Monetary policy primarily involves changing interest rates to control inflation. Governments through fiscal policy, however, can assist in fighting inflation. Governments can reduce spending and increase taxes as a way to help reduce inflation.

Is there a relationship between interest rates and inflation? ›

Inflation and interest rates tend to move in the same direction, with one often chasing the other as they rise and fall. The relationship mirrors basic supply and demand principles. As inflation falls, so do interest rates. It becomes less expensive to borrow money, thus there's more money circulating in the economy.

Does high interest rate cause recession? ›

Do Interest Rates Rise or Fall in a Recession? Interest rates usually fall during a recession. Historically, the economy typically grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Often, this results in a recession and a return to low interest rates to stimulate growth.


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