Interest rate cut could still be months away despite inflation drop - analysts

Most analysts are anticipating that interest rates will remain unchanged at 5.25%

Hopes for a reduction in higher costs may be dashed for borrowers, with the UK's interest rates unlikely to decrease this Thursday, despite inflation reverting back to target.

Most analysts are anticipating that interest rates will remain unchanged at 5.25%, as an announcement from the central bank is approaching. This comes after latest figures revealed that inflation hit the 2% target last month, for the first time since July 2021. Rishi Sunak expressed a resounding "we've got there" upon hitting the target, asserting it's proof the economy has "turned the corner" thanks to weathering prolonged periods of above-target inflation.

It precipitated speculation over whether interest rates, used by economists to reign in inflation, could now be reduced. But analysts warned that a summertime dip in rates might not occur until most of the Bank's Monetary Policy Committee (MPC) members are wholly confident that inflation isn't still under control.

Significantly, the services inflation rate, considering only service-related sectors like hospitality and culture, and a crucial policy decider, remains stubbornly high. "Indeed at 5.7%, [services inflation] is now 0.4 percentage points above the Bank's forecast from the May Monetary Policy Report," said James Smith, developed economist for ING.

"That all but confirms the Bank of England will keep rates on hold on Thursday. We're therefore sticking to our call for the first rate cut to come in August, with a total of three cuts this year."

Experts have highlighted that the Bank's rates decision is scheduled just two weeks before the UK is set to go to the polls for a General Election, which might lead the Bank to proceed with extra caution. During the pre-election campaign period, it's expected that policymakers will refrain from giving any speeches or making public comments.

AJ Bell's director of personal finance, Laura Suter, commented: "It's highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut. With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates."

Despite this, financial markets seem less convinced about an August rate cut, with some analysts suggesting it may be postponed until September. The MPC is also likely to consider the most recent GDP figures, which indicated that the UK economy saw no growth in April, but experienced a 0.7% expansion over the three months to April.

Chancellor Jeremy Hunt has expressed his hope that the Bank will cut interest rates soon, which would help to reduce mortgage costs. "Now we have inflation down, taxes starting to come down and, hopefully soon, mortgages coming down as well," he stated.