Inflation Dip Raises Interest Rate Hope

19.09.2007

The likelihood of another increase in interest rates this autumn has been pushed further into the distance by the latest news on inflation.

According to the Consumer Price Index (CPI), inflation dropped by 0.1 per cent in August compared to the previous month, meaning the Bank of England's interest rate rises over the past year appear to have had the required impact on the market. Since August last year, the bank's monetary policy committee (MPC) has increased the base rate from 4.5 per cent to 5.75 per cent, in an effort to keep a lid on rising inflation.

There had been suggestions that those efforts were not having the desired effect earlier this year when the CPI broke through the three per cent mark, but since that peak inflation has fallen back dramatically, to its August position of 1.8 per cent. The change means that predictions of a further rise in interest rates in the coming months seem now to be wide of the mark, with the next move more likely to be a cut in rates.

"The August consumer price inflation data are pretty encouraging overall for the Bank of England, making it even more likely that interest rates have peaked at 5.75 per cent," said Howard Archer, chief UK and European economist at Global Insight.

However, with the current turmoil in the global financial markets, it seems that the MPC will be minded to keep interest rates at their current level for the time being, in an effort to provide some stability to the UK sector.

Dr Archer commented: "The Bank of England remains firmly in 'wait and see' mode for the time being, although we do anticipate that the next move in interest rates will be downwards."

The housing sector would be keen to see a cut in interest rates, after the recent rises have led to a slowdown in the market sector. The Retail Price Index for August revealed a 0.3 per cent increase, with a rise in mortgage repayments one of the prime reasons for this increase. Many homeowners are struggling with the current higher rate of interest that has resulted from the MPC's moves to curb inflation over the past year and lenders will also be keen to see some stability to help engender further growth in the property sector.