Inflation figures reduce rate rise fears

Concerns that interest rates could reach six per cent before the end of the year have been quelled as new figures have shown a fall in inflation.

According to the latest Consumer Price Index, inflation fell during July by 0.5 per cent, to 1.9 per cent. The figure is well below analysts' expectations and is also now 0.1 per cent below the government's target for inflation of two per cent. This is the first time since March 2006 that inflation has fallen below the target figure and represents something of a relief for many lenders as it should reduce the risk of interest rates being pushed up further by the Bank of England.

The bank's monetary policy committee (MPC) has raised interest rates by 1.25 per cent since August last year in a bid to keep a lid on inflation. Those efforts had shown little sign of success and as such analysts had been predicting a further quarter point hike later this year as the MPC looked to bring inflation back towards the required level. However, with inflation now having subsided somewhat, there could be a relaxing in the mortgage market and interest rates may be more likely to stabilise.

Commenting on the fall in inflation, Howard Archer, chief UK and European economist at Global Insight, said: "Consumer price inflation fell back far more than anyone was expecting in July, including, we strongly suspect, the Bank of England." Describing the drop as "a massive surprise", Mr Archer added: "This will boost expectations that interest rates have peaked at 5.75 per cent, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates, for now at least."

It is believed that one of the main factors behind the fall in inflation over the past month has been the lower cost of food. However, following the recent flooding across much of England, it has been predicted that the cost of many basic foods - such as potatoes - will result in food prices escalating again this autumn. If that occurred, inflation could begin to rise again, meaning the MPC is unlikely to cut interest rates in the short-term.

It does, however, appear that the MPC is likely to keep the base rate on hold for some time now, with some optimists predicting rates will fall rather than rise when the committee next changes interest rates.