UK Inflation Rate Slowdown and Bank of England Interest Rate

• July 21, 2017
• By Pete Nisbet
• 0

June’s slowdown in the UK inflation rate has reduced the chances of a Bank of England interest rate hike. There had been talk of the British interest rate rising after a decade of stability. However, the rate of inflation in the UK seems to have slowed down, suggesting that the rate will remain unchanged.

UK Inflation Rate Dropped May to June

The inflation rate based on consumer prices in May was 2.9%, the highest level for almost four years. However, come June and the percentage increase had dropped to 2.6% compared to a year ago. According to Mark Carney, Governor of the Bank of England, the main reason for inflation was the reduction in sterling since the Brexit vote to leave the EU. Nothing has intrinsically changed, and inflation will rise above target for a while until the Brexit situation has been resolved.

There appears to be no significant reason why an interest rate increase should be needed. UK bond prices have increased, the pound dropped slightly, by just half a cent against the dollar, and the increase in the inflation rate dropped between May and June. Few people are now betting on a rate increase at the next BoE meeting on 3rd August.

UK Income Increasing Slower Than Prices

Part of the inflation rate drop was due to a drop in global oil prices falling. However, the inflation rate could easily begin to rise again. Income is currently rising at a slower rate than prices.

The effect of Brexit has been a gradual increase in the price of food and other imported goods. While incidental factors such oil price fluctuations can create temporary drops in the inflation rate, steadily increasing prices in the shops will inexorably lead to increases.

Value of Pound Dropped Since Brexit

The value of the pound has dropped significantly since the Brexit vote, yet there have been no interest rate changes. The reason given for this by the bank of England is that the effects of Brexit will only be temporary. According to Carney, if the UK economy picks up and wages increase with it, then a rate change might be on the cards.

For now, most experts appear to agree that the BoE interest rate will remain at 0.25%, where it has been since August 4th last year.