Signs that inflation has turned a corner have fuelled hopes that policymakers could soon take their foot off the gas over rate rises.
The Bank of England is poised to lift UK interest rates to fresh 15-year highs as its long-running fight to control the rising cost-of-living continues.
But signs that inflation has turned a corner have fuelled hopes that policymakers could soon take their foot off the gas over rate rises.
Most economists expect the Bank’s Monetary Policy Committee (MPC) to lift the base rate by 0.25 percentage points on Thursday, taking it to 5.25%.
The last time it stood at 5.25% was in March 2008.
It would mark a smaller increase than the half-point rise pushed through at the last MPC meeting, amid more encouraging signs that price rises have begun to cool.
UK Consumer Prices Index (CPI) inflation was 7.9% in June, down from 8.7% in May and the lowest rate since March 2022, according to official figures from the Office for National Statistics (ONS).
It means that rates – which are a tool used by the Bank to bring inflation down to its 2% target – may not need to climb as high as feared.
But another increase on Thursday would pile more pressure on borrowers who are already facing big increases in monthly bills thanks to mortgage rates moving higher.
And economists have warned that they cannot rule out a bigger rate hike on Thursday as the Bank still faces pressure to take the heat out of price and wage rises.
Investec Economics predicts a 0.5 percentage point increase, before pushing through a final quarter-point hike the following month.
It comes amid signs that the UK economy is slowing under the weight of higher interest rates.
House prices fell at the fastest annual rate in 14 years in July, as housing affordability has been stretched for people looking to buy a home with a mortgage, Nationwide said.
The slowing market has had a knock-on effect on a number of housebuilders and builders’ merchants who have flagged much weaker demand for properties.
Furthermore, growth in Britain’s services sector slowed last month, as concerns over interest rates and the economic outlook took a toll on consumer demand, S&P Global said in its PMI survey.
The MPC will produce new forecasts on the path for inflation and gross domestic product (GDP) along with its rates decision on Thursday.
It will shine a light on how likely the Prime Minister is to meet his target of halving inflation to about 5% by the end of the year.
Rishi Sunak said on Wednesday that inflation is not falling as fast as he would like, but that people can “see light at the end of the tunnel”.
Meanwhile, banks are under more pressure to pass rate rises onto savers.
Myron Jobson, senior personal finance analyst for Interactive Investor, said: “There might be a bit more urgency among banks and building societies to pass on the base rate rise to their savings products this time around as the Financial Conduct Authority (FCA) has recently gained new powers to take robust actions against those offering unjustifiably low rates.”
The FCA this week shared a 14-point action plan to make sure that savers are being offered better deals.