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Odds of August rate cut as low as 25% after disappointing inflation data, while gilt yields spike

Journalist: John Choong (Head of Markets and Research), Newspage

ended 17. July 2024

On the back of a disappointing inflation print (2%), which came in above consensus estimates of 1.9%, the odds of an August rate cut have now been pared back to as low as 25% from 50% last week — and understandably so.

Services inflation remains stubbornly sticky at 5.7%, with hot demand from strong GDP growth likely to continue fuelling the inflation flame. This was estimated from the Output Price Inflation metric from the Services Purchasing Managers' Index (PMI) survey released earlier this month.

The hotter-than-expected services inflation print was mainly due to sectors that were most susceptible to the influx of demand from Taylor Swift's concerts, which saw their inflation rates tick up. These include Transport, which saw its inflation rate increase to 0.9% from 0.5%, as well as Restaurants and Hotels, which spiked to 6.2% from an already high 5.8%.

It doesn't look pretty when looking at all the inflation elements on a 6-month annualised rate either. This figure is calculated by taking the last 6 months' inflation rates and annualising them in order to avoid month-on-month (M/M) volatility. Even excluding April's data due to its one-time effects, inflation has been heating up again.

This puts an element of fear around the Bank of England's ability to keep inflation at its mandated target. The downward trend in inflation from its peak was driven by falling energy prices, which are expected to rise again in September. This creates inflationary pressure, with CPI forecast to rise to 2.4% by Q4.

What's more, even though inflation is back at its 2% target, there's no urgency to cut rates. Particularly as the unemployment rate remains historically low at 4.4%, GDP growth is annualising at a rate (2.8%) not seen since 2014 (ex. pandemic years of 2021 and 2022), and consumer confidence is rebounding towards 2019 levels.

Subsequently, the FTSE is in the red on the back of the inflation print. Meanwhile, gilt yields, a leading indicator for mortgage rates, have jumped this morning to 3.92% from 3.88% yesterday. This could spell a difficult period for the housing market which may serve as a dampener to the high spirits felt over the past month as mortgage rates dropped across the board.

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8 responses from the Newspage community

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Stephen Perkins
Managing Director at Yellow Brick Mortgages
There was a time not so long ago that your hand would be bitten off if you offered two consecutive months of 2% inflation. However, it seems that because some had predicted better, it’s now not good enough. The base rate needs to be reduced sooner rather than later. People and borrowers are tired of the bank of England's excuses and constantly moving the goalposts as to why it cannot cut.
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Craig Fish
Director at Lodestone Mortgages
There is no doubt deciding when to cut rates is a difficult decision. A bit like would-be parents deciding if they are prepared enough to have a child. You never feel prepared enough, or that now is the right time. Sometimes you just have to go for it, and ultimately things always turn out right. If the Bank of England doesn't cut rates in August, there is every chance that we won't see a cut this year. This will lead to mortgage rates increasing, house prices falling and general dismay for households and businesses up and down the UK as pockets continue to be stretched to the limit.
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Riz Malik
Independent Financial Adviser at R3 Wealth
If we continue to wait for perfect conditions, we will not see rate cuts for some time. The Bank of England need to look at the bigger picture. With regret, Swati Dhingra seems to be the only member of the MPC who has a grip on reality.
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Bob Singh
Founder at Chess Mortgages
Inflation figures out today reveal opposing forces which will leave many feeling deflated. It appears the steam in the economy isn’t running out any time soon as core inflation remains stubbornly high. We can’t blame this on Gareth Southgate or Taylor Swift but hard pressed borrowers on high or variable rates will continue to feel the heat this summer. With the Bank of England ignoring any calls to cut rates thus far, September may be the earliest we see any movement in the base rate.
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Rohit Kohli
Director at The Mortgage Stop
With the Prime Minister due to give his speach today saying it’s time to take the brakes off Britain, I think his team needs to send the Bank of England and the MPC that memo. Today's figures are perfect for anyone who wants to sit on a fence and do nothing but that’s not what I expect from these well paid, out-of-touch bankers who need to think about how on earth the economy can really get going with borrowing costs remaining this high.
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Dariusz Karpowicz
Director at Albion Financial Advice
I am more inclined to put the odds on a small rate decrease by the MPC. This could positively impact the housing market, boost prices a bit, and prompt lenders to decrease rates further, giving mortgage payers some much-needed breathing space. If I had to bet on it, we could expect at least two rate decreases this year. If inflation rebounds above 2%, the Bank of England might hold off on cuts, but the pressure to stimulate the economy could sway them otherwise. Let's see if the markets or the Bank of England get it right.
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David Stirling
Independent Financial Advisor at Mint Wealth
This will be a further and unexpected blow to an already faltering property market. With certain sectors such as services and hotel prices holding inflation levels high - some in the press attributing to the Taylor Swift tour - it now feels disappointingly like the rate cut will not arrive in August. In Northern Ireland, where house prices rose by 4.1%, we are certainly going to see a slow autumn as we are pinched on all sides.
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Jack Tutton
Director at SJ Mortgages
The Bank of England need to be decisive and make a positive move in August during the next meeting, the change in odds for a cut next month will be extremely disappointing for mortgage holders or people hoping to get onto the property ladder in the remainder of the year. Inflation can be determined by seasonal activities, with a number of high-profile events happening so far this summer, it is not surprising that hotel costs remain high and this is a key driver for by inflation remained at 2%. With the build up to Christmas only a short few months away, if we carry on at this rate, we'll never see a cut in the base rate.