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Inflation Milder Eases Pressure on UK Interest Rates
The UK’s inflation rate unexpectedly slowed down in June, leading to predictions of a less sharp rise in interest rates. The Bank of England, which had raised rates 13 times since December 2021 to combat surging price levels, is now expected to face reduced pressure to take immediate action, as inflation dropped to 7.9% in June from the previous month’s 8.7%. This decline marks the lowest inflation level the UK has seen in over a year.
The decrease in inflation was primarily attributed to falling fuel prices and a slower increase in food prices, as reported by the Office for National Statistics (ONS). While the drop in inflation is a positive sign, the UK’s inflation rate still remains significantly higher than the Bank of England’s official 2% target and exceeds the rates seen in other developed countries. For instance, inflation in the US is at 3%, and in the eurozone, it stands at 5.5%.
With the intention of curbing rising prices, the Bank of England had raised interest rates from near zero to the current level of 5%. The strategy was to make borrowing more expensive, thereby encouraging consumers to spend less and cool down the rate of price increases. However, this significant rise in interest rates also resulted in the average two-year fixed residential mortgage rate climbing to 6.81%, and the five-year rate reaching 6.33%, the highest levels in 15 years. Despite the recent drop in inflation, economists still expect further interest rate increases, with the Bank likely to raise rates to 5.25% in its upcoming decision on 3 August, and possibly reaching a peak of 5.5% due to lingering inflation pressures.
While the unexpected decline in inflation offers some relief, analysts caution that without this development, interest rates could have soared even higher, impacting homeowners and leading to a million households facing an additional £200 or more on their monthly mortgage payments by year-end.