The headline CPI inflation rate fell to 6.7% in August, confounding economists who had expected it to increase.
Core inflation, which the Bank of England pays close attention to, fell sharply to 6.2% from 6.9%, after it had been expected to fall slightly. Services inflation, another closely watched measure on Threadneedle Street, also fell sharply to 6.8%, well below the bank’s own forecast of 7.2%.
This will raise hopes that the bank can maintain interest rates for the first time since 2021 when the Monetary Policy Committee meets tomorrow. The bank has raised interest rates at each of the last 14 meetings, increasing pressure on mortgage holders.
Before today’s reading, markets saw another 5.5% rise, which is very likely.
But City traders now believe the decision on whether to raise interest rates or pause tomorrow is actually likely, with each being given a probability of around 50%.
Martin Beck, chief economic adviser to the EY ITEM Club, said: “The case that interest rate rises have now gone far enough looks increasingly compelling and the MPC could present a ceasefire decision as a ‘wait and see’ rather than simply resolution”. A definitive end to rising interest rates.”
“It’s a very close outcome, but we’re still leaning toward saying the bank will follow through with rate hikes tomorrow,” said James Smith, developed markets economist at ING.
If the bank raises interest rates, the city believes this will be the last hike before it considers cutting rates again.
“It looks like Andrew Bailey will get his wish, and tomorrow’s rally will be the last of this cycle,” said Chris Beauchamp, chief market analyst at IG Group.
Hope that interest will peak soon has boosted London stocks. Housebuilders such as Taylor Wimpey, Barratt Developments and Berkeley were among the risers as the FTSE 100 rose back above the 7,700 level.
However, the pound fell on the prospect of easing monetary tightening, falling to $1.236, its lowest level since May.
A lower peak rate means good news for mortgage rates. Interest rates offered by major lenders have fallen steadily from 15-year highs over the past two months, but look set to fall further as government bond yields – used to price mortgages – fall today.
The yield on two-year government bonds was over 5% yesterday, but fell to 4.85% today, while the yield on five-year bonds fell from 4.53% to 4.42%.
Andrew Montlake, managing director of mortgage broker Coreco, said he expects more 5% fixed-rate deals: “We have already seen the first fixed rates below 5%, and we are now likely to see more options at that level.”