Bank tipped for half-point rates rise despite small fall in inflation

The Bank of England has delayed the next interest rate rise due to the death of The Queen (PA) (PA Wire)

The Bank of England is expected to press ahead with a half-point rise in interest rates next week despite the first fall in the inflation rate for almost a year.

The Consumer Prices Index (CPI) benchmark rose by a slightly less than expected 9.9% in the 12 months from August, down from 10.1% in July.

City economists said while a 75 basis point (bps) hike in the cost of borrowing was now probably off the table, rates were almost certain to be increased from their current 1.75% to 2.25%.

The Bank’s Monetary Policy Committee (MPC) had been due to meet on tomorrow, but the decision on rates has been delayed until next Thursday following the death of the Queen.

Martin Beck, chief economic adviser to the EY ITEM Club, said: “The MPC appears unlikely to adopt a markedly more doveish approach in response to the good news on inflation.

“The committee is likely to be concerned about the implications of much looser fiscal policy for inflation over the medium term, and the EY ITEM Club expects it to press ahead with a 50 bps rate hike at next week’s meeting. Indeed, if it doesn’t opt for a 50 bps hike, it will almost certainly be because its members have opted for a larger increase.”

Paul Dales, chief UK economist at forecaster Capital Economics, said: “Overall, we think CPI inflation will peak around 11% just before the end of the year and that core inflation will continue to edge higher too. That means the Bank will have to continue raising interest rates, from 1.75% now to 3% if not higher.”

A drop in the price of fuel was the main reason for the fall in CPI. According to the RAC, the cost of unleaded petrol has dropped from a peak above 191p a litre at the start of July to around 167p this week. But food and non-alcoholic beverage prices rose by 13.1%  — up from 12.7% in July — the highest rate since August 2008.

Centre for London research director Claire Harding, said: “Today the inflation rate has fallen slightly, but remains high. This is welcome news but many Londoners won’t actually have experienced a fall as it is driven by falling petrol costs, and many don’t have cars.

“Support for energy bill freezes is a welcome start, but the Government’s response must also involve recognising the increased pressures, including rising rents, that Londoners face.”

Inflation is now expected to start falling over the winter as the Government’s pledge to cap average energy bills at arounds £2,500 takes some of the sting out of the cost of living crisis

It comes the day after worse than feared US inflation spooked financial markets all over the world.

The US CPI rose 8.3% in the year to August, down on July’s 8.5% — but higher than forecasts of a drop to 8.1%.

The news sent US and Asian stock markets tumbling and the dollar surging in expectation that the US Federal Reserve will have to raise interest rates by as much as a whole percentage point at its meeting later this month.