A specialist mortgage lender is warning that the higher than expected leap in inflation may trigger a rise, not a fall in interest rates.
The headline UK inflation rate jumped to 3.5% in the year to April, its highest level since February 2014, the Office for National Statistics says.
The rise, which exceeded economists’ predictions of 3.3%, was largely driven by increases in household energy bills, water costs, council tax, airfares and services inflation, which grew by 5.4%. Just as month ago inflation dipped from 2.8% to 2.6%, making the latest figure surprising.
It is a setback for both homebuyers and the wider economy, with the Bank of England now expected to take a more cautious approach to rate reductions.
The money markets have already been pricing in just one more quarter-point cut over the next 12 months, rather than the two or three before the data was released, and there is only a 50% chance of a cut in August.
Peter Stimson, director of mortgages at MPowered, claims this is worse than expected. He stated “the surge in inflationary pressure won’t just translate into a slowdown in base rate cuts. We’re in ‘handbrake on’ territory. The prospect of the Bank of England reducing its Base Rate again in June has shifted from slim to non-existent.
With the economy starting to expand at a decent clip, the Bank is now less concerned about stimulating growth. Getting inflation under control, and forcing it back down towards its 2% CPI target, is once again the Bank’s top priority. It will have its work cut out, as there are some worrying trends below the surface of today’s inflationary numbers. And while a number of temporary factors make April’s spike look particularly bad, no-one should expect inflation to return to target by itself.”
Not every analyst has ruled out a base rate cut next month, although most accept it’s no longer a dead cert.