POLL: Should Bank of England cut interest rates now inflation is at 2%? Vote now | Personal Finance | Finance


UK inflation has returned to the two percent target for the first time in almost three years in what comes at a critical time, just weeks before the nation heads to the polls.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation fell to two percent in May, down from 2.3 percent in April.

It follows nearly three years of above-target inflation, with CPI last recorded at two percent in July 2021, before shooting higher amid the cost-of-living crisis.

The data will be watched closely ahead of the Bank of England’s next interest rate decision on Thursday, but policymakers are widely expected to hold fire on any cuts until after the General Election on July 4.

It comes less than three weeks before polling day and as the political parties home in on economic pledges in their manifestos.

Despite fears that the Bank of England will keep rates the same so as not to risk being seen as political, hope persists that its Monetary Policy Committee could grant some much-needed relief to mortgage hoders on Thursday.

Its Monetary Policy Committee (MPC) raised the Base Rate 14 times consecutively from December 2021 until August 2023, leaving it at a 16-year high of 5.25 percent.

This sent loan and mortgage interest rates rocketing, adding thousands to people’s monthly bills and leaving many in arrears or at risk of home repossessions. The high Base Rate did have a positive impact on savings, however, with people benefiting from some of the highest returns in decades.

While inflation has been falling month-on-month since 2022, the MPC has largely voted to keep interest rates frozen at 5.25 percent due to needing “more evidence” that inflation will stay low before reducing rates.

With inflation now running at 2.3 percent, many argue this should be enough evidence for the MPC to finally start reducing the Base Rate and alleviate pressure on household finances.

Some analysts suggest the figures are „setting the stage“ for an interest rate cut as early as summer, although some argue “more needs to be done” before the Bank of England can be sure that inflation is heading in the right direction.

Julian Jessop, an economics fellow at the free market think tank, the Institute of Economic Affairs, argued: “The fall in UK inflation from 3.2 percent in March to 2.3 percent in April was slightly smaller than expected, but still another big step in the right direction.

„Admittedly, the ‘core’ rate excluding food and energy, at 3.9 percent, was still nearly twice the MPC’s two percent target for headline inflation. Services inflation remained high, at 5.9 percent.

„Nonetheless, this should not prevent the Bank of England from cutting rates in the summer. April was always going to be a tricky month as wages and other costs which are indexed to inflation caught up with the previous increases. The unusually large hike in the National Living Wage took effect last month too.”

However, Mr Jessop noted: “These are lagging indicators and policy should be forward-looking. Monetary growth has now settled at rates consistent with low and stable inflation, and there are plenty of signs that the labour market is cooling. Energy and food inflation also have further to fall.

„Indeed, the first interest rate cut could still come in June. The MPC will then have another set of inflation and labour data and more evidence on the latest pay settlements.

“If not June, then rates should be cut in August. Any further delay would risk tipping the economy back into an unnecessary recession.“

However, Labour’s Darren Jones said: “Core inflation is still around 3.6 to 3.9 percent, which is hotter than the markets were expecting it to be. This is not out of the woods yet. It is in the right direction but there is still much more to be done.

„The one reason that the headline rate of inflation has come down closer to two percent today even though the cost of other things are remaining a bit too high is because of the energy bills.

„The problem there is if something happens in the world and gas prices rocket again, we are going to be back into that inflationary environment with very high bills.“

So, do you think the Bank of England should cut interest rates now inflation is at 2.3 percent? Vote in our poll and have your say in the comments.

If you can’t see the poll below, click here.



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