Yahoo Finance Interest rates: Markets expect a hike as UK 'core inflation' remains stubbornly high
Core inflation, which excludes energy, food and tobacco prices, rose to 6.8%
Economists have raised the alarm that the Bank of England’s Monetary Policy Committee could be forced to hike interest rates from 4.5% in June, in yet another blow to homeowners.
UK inflation dropped to 8.7% in April as the measure of price rises slips out of double-digit figures for the first time since last summer but high food prices persist.
This figure is down from the 10.1% that was recorded in March, according to the Office for National Statistic (ONS).
However, core inflation – which excludes energy, food, alcohol and tobacco – actually rose by 6.8% in the 12 months to April 2023, up from 6.2% in March, which is the highest rate since March 1992. This is a closely watched measure by the Bank of England when deciding interest rates.
Jake Finney, an economist at the PwC accounting firm, said: "More troublingly, services inflation – which the Bank of England pays close attention to – rose from 6.6% to 6.9%.
Read more: Inflation: The supermarket items that have gone up in price the most
"This is its highest rate since March 1992 and is higher than the Bank of England's expectation of 6.7% earlier this month."
Amid "more persistent inflation pressures", he believes the Bank will not hit its 2% target until late 2024.
The BoE is due to announce its next decision on rates on June 22 and after Wednesday's data investors were pricing the likelihood of another quarter-percentage point increase in borrowing costs next month at 100%, up from 83% on Tuesday.
Markets anticipate the base rate could reach a peak of almost 5.4% before the end of the year, almost a whole percentage point higher than the current level, according to data from Refinitiv.
Pantheon Macroeconomics said: "A further increase in Bank rate to 4.75% at the MPC's next meeting on 22 June, from 4.5%, now is firmly on the table."
Surging food prices and rising inflation in the services sector will be a "worry" for the Bank, the firm said.
"With inflation proving stickier than the Bank expected, it now seems all but certain that the Bank will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after," Paul Dales, chief UK economist at Capital Economics, said.
Read more: Interest rates may rise despite inflation falling, says Bank of England's Bailey
UK inflation has been the highest among the G7 advanced nations, highlighting Britain's reliance on imported energy and food.
The official figures came a day after the International Monetary Fund warned that interest rates in Britain would likely have to rise further from 4.5% and “remain high for longer” to get a firm grip on inflation.
Rob Clarry, investment strategist at wealth manager Evelyn Partners said: "As we outlined last week, the Bank of England’s decision on whether to continue its hiking cycle will depend on the incoming data. The latest CPI data increases the probability of another increase at the June meeting.
"This was another disappointing inflation print for the Bank of England. With core inflation at a thirty-year high, we now expect another hike at the June MPC meeting."
Inflation falls from 10.1% to 8.7% but…
- bad news for Bank of England = core inflation rose from 6.2% to 6.8%.
- bad news for families = food price inflation is stubbornly high at 19.1% and moving centre stage in the cost of living crisis— Torsten Bell (@TorstenBell) May 24, 2023
By raising interest rates, the theory is that people spend less, demand goes down and then this should mean inflation drops. But mortgages rates are usually linked to interest rates, meaning those who are not on a fixed-rate mortgage face steep increases to their monthly repayments.
Read more: UK inflation falls to 8.7% in April but high food prices persist
Raj Badiani, principal economist at S&P Global Market Intelligence, said: “Rising service and core inflation in April suggests the Bank of England has little option but to continue its current tightening cycle.
“We now expect the policy rate to rise by 25 basis points to 4.75% at its next meeting on 22 June while acknowledging the rising probability of a further hike in early August.”
Watch: UK Latest: Higher-Than-Expected Inflation Adds Pressure on BOE to Hike Rates
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