Markets bet on August interest rate cut despite surprise inflation jump
Though inflation remains well above the Bank of England's target rate of 2%, most economists think the central bank will cut interest rates again at its next meeting on 7 August.
Since its first quarter-point rate cut last August from the 16-year high of 5.25%, the Bank of England has been cautious, reducing interest rates every three months to the current 4.25%.
Read more: UK inflation unexpectedly rises in June on higher fuel prices
The Office for National Statistics (ONS) said consumer prices rose by an annual rate of 3.6% in June, up from 3.4% in May. That was the highest rate since January 2024.
The ONS added that higher food prices were primarily behind the increase. Fuel and transport costs also contributed.
Money markets indicate there is an 87% chance that policymakers will lower borrowing costs in August, down from an 89% probability on Tuesday.
Suren Thiru, economics director at ICAEW, said: 'June's uptick is the start of a slight summer surge in inflation with skyrocketing business costs and global trade turbulence likely to lift the headline rate moderately higher by the autumn, despite July's drop in energy bills.
'While June's hot inflation won't deter policymakers from sanctioning an August policy loosening, given mounting worries over economic conditions, these figures may increase caution over the pace of future rate cuts.'
Services inflation, a measure the central bank views as a better guide to domestically generated price pressures than the headline rate, held steady at 4.7% in June.
Read more: FTSE 100 LIVE: Stocks muted as UK inflation unexpectedly jumps to highest since January 2024
Sanjay Sanjay, Deutsche Bank's chief UK economist, said: "Is an August rate cut in jeopardy? No, we don't think so. There's enough of a slowdown in GDP and the labour market to warrant a 'gradual and careful' easing of monetary policy. But the onus now rests on the labour market to shape how far and how fast the MPC can cut this year and next."
Last month, the central bank's Monetary Policy Committee (MPC) voted six to three to keep rates unchanged at 4.25%, following a quarter-point cut in May.
The MPC, which has an inflation target of 2%, has reduced interest rates four times since last summer.
Chris Beauchamp, chief market analyst at IG, said: "Today's CPI data spells more pressure for consumers thanks to the surge in food prices, but the overall picture doesn't quite spell the end for any further rate cuts.
"Core goods and services inflation was broadly contained, and the focus shifts now to the job numbers tomorrow to see if there are further signs of weakness that might keep the Bank of England on course to ease policy in upcoming meetings."
Markets are betting the BoE will cut rates one more time by the end of the year.
However, the latest inflation figures still represents a setback for policymakers at Threadneedle Street.
Read more: Bank of England could cut interest rates faster if jobs market slows, Bailey says
Isaac Stell, investment manager at the investment service Wealth Club, said: "The surprising strength of the inflation figures adds additional issues to the UK's mounting economic woes. All eyes will turn to the Bank of England who have indicated they are willing to cut rates given the cooling in the jobs market but are unlikely to be able to justify a cut when inflation has started to run hot once again.
"In the absence of interest rate cuts, consumers are likely to feel a continued squeeze, unhelpful for the government's growth agenda which has yet to show signs of life itself. Awful April has rolled into miserable May and in turn rolled into joyless June. The government will now pin its hopes on a Jubilant July."
Andrew Sentance, who sat on the Monetary Policy Committee from 2006 to 2011, said it would be 'irresponsible' for it to cut interest rates after the jump in inflation.
Bank governor Andrew Bailey said in an interview with The Times newspaper earlier this week that rates could be cut further if the jobs market slows down, saying 'I really do believe the path is downward'.
The UK labour market statistics will be published this Thursday at 7am in London. The Bank of England will announce its decision on interest rates on 7 August around noon.
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