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Borrowers were given a boost yesterday as lower-than-expected inflation figures all but closed the door on the prospect of an interest rate hike today.
The Office for National Statistics (ONS) said that consumer prices index inflation remained unchanged at 2.8 per cent in May.
Forecasters had expected it to climb to 3 per cent after US president Donald Trump’s war on Iran choked off oil and gas supplies from the Middle East via the Strait of Hormuz.
UK ten-year borrowing costs fell, with yields on ten-year government bonds, known as gilts, dipping below 4.74 per cent, a two-month low.
The figures will add to hopes that the ‘Trumpflation’ impact of the war may turn out to be smaller than expected – especially now that a US-Iran deal has been signed, promising a reopening of the strait to shipping by the end of this week.
And they come ahead of today’s interest rate-setting meeting at the Bank of England, which is widely expected to see interest rates left on hold at 3.75 per cent.
Borrowing boost: The Bank of England's Monetary Policy Committee is widely expected to keep interest rates on hold at 3.75%
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Earlier during the war, markets had been betting on as many as four rises in 2026 as inflation pressures mounted.
But yesterday, traders were pricing in just one increase for this year.
Markets last night saw a 96 per cent chance of rates remaining on hold today and an 80 per cent probability that they will remain unchanged at the next meeting in July.
That suggests that if any increase does come it will not be until the autumn.
And some economists now believe that, with the economy stumbling and the jobs market struggling, the next move from the Bank’s Monetary Policy Committee ought to be a cut.
Yesterday’s ONS figures did show the war continuing to have an impact on inflation.
Petrol prices climbed to an average of 157.4p per litre last month, the highest level since November 2022 – in the months after the outbreak of conflict in Ukraine. And fuel price inflation hit 24.6 per cent, also the highest since 2022.
Air fares and vehicle taxes also increased, but these were offset by lower food prices, the ONS said.
In a sign of underlying price pressures, services sector inflation climbed to 3.7 per cent.
And a separate measure of raw material and fuel inflation for manufacturers climbed to 8.7 per cent, the highest since February 2023.
A further increase in headline inflation is already baked in for the summer when energy regulator Ofgem’s next price cap takes effect in July, which will mean typical annual household energy bills climb by 13 per cent.
But Yael Selfin, chief economist at KPMG, said: ‘Today’s data strengthens the case for a continued cautious approach from the Bank of England.
‘Underlying inflationary pressures have yet to show clear signs of strengthening, which is likely to underpin a majority decision within the Monetary Policy Committee to hold interest rates.’
David Hollingworth, associate director at L&C Mortgages, said the inflation reading was a ‘nice surprise’ and ‘should be a boost to mortgage borrowers’.
‘With no disruption to the market’s expectation of another hold, there shouldn’t be any negative impact on an improving picture for mortgage rates,’ he added.
‘Markets have priced in potential interest rate rises since the conflict began, which forced mortgage rates higher. However, since then fixed mortgage rates have eased back.
‘The announcement of a peace deal has seen swap rates fall back and today’s figures should help that to continue.’
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