Encouraging News: UK Inflation Hits 15-Month Low, Paving the Way for Favourable Interest Rates and Market Optimism
UK inflation dropped to a 15-month low of 7.9% in June, surpassing expectations and increasing the likelihood of the Bank of England (BoE) raising interest rates by only 0.25% next month. This news led to a decline in the value of the pound, while property stocks experienced a rally.
According to the Office for National Statistics, annual inflation decreased from 8.7% in May. This figure was lower than the 8.2% predicted by economists surveyed by Reuters, marking the end of a four-month period during which price growth exceeded forecasts. The June figure aligned with the BoE’s forecast of 7.9% made in May, representing the lowest inflation rate since March 2022.
Traders now anticipate that the BoE’s benchmark interest rates will peak just below 6% in early 2023. This is a downward revision from previous expectations that rates would peak slightly above 6% based on the inflation figures.
The decrease in inflation is expected to alleviate pressure on mortgage rates, as previous months saw stronger-than-expected price and wage growth, leading to increased expectations and payments for borrowers.
Grant Fitzner, Chief Economist at the Office for National Statistics, stated that in June, “inflation significantly slowed to its lowest annual rate since March 2022, driven by declines in motor fuel prices.” The price of transportation, led by motor fuel, fell by 1.8% annually last month.
Despite the larger-than-expected decline, UK price growth remained higher than in other G7 countries. Economists attribute this to a combination of surging energy costs and labor shortages.
In June, US inflation dropped to a 27-month low of 3%, while price growth in the eurozone reached a 17-month low of 5.5%.
Capital Economics economist Paul Dales commented, “The UK will probably still have higher rates of inflation than elsewhere for a while yet, but at least the UK is now following the global trend.”
As mentioned in our previous article about inflation published in May, there are indications that both the US and UK are experiencing a similar downward trend, although they may be at different stages. It appears that the US is slightly ahead in this trend. The Bank of England may raise rates again, and markets may be volatile in response, but remember that rates are higher in the US currently, and inflation is lower, so this may be what it takes for the UK to catch up.