UK inflation stuck at 8.7%, in blow for interest rate hopes

Inflation in the UK was unchanged in May, remaining at 8.7 per cent, according to the Office for National Statistics. Economists had been expecting a fall to 8.4 per cent. Rising prices for air travel and second-hand cars put the upward pressure on the inflation numbers, while the falling price of petrol provided the downward pressure. Core inflation, which strips out food and tobacco, was 7.1 per cent in the 12 months to May, up from 6.8 per cent in April , and the highest rate since March 1992, the ONS said. Hopes that the Bank of England might pause its monetary policy tightening and leave interest rates on hold have been dashed. It is now almost inevitable that the Bank of England's Monetary Policy Committee will raise interest rates for the 13th time in the current cycle to 4.75 per cent on Thursday. “We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy, while also providing targeted support with the cost of living,” UK Chancellor Jeremy Hunt said. “We know how much high inflation hurts families and businesses across the country and our plan to halve the rate this year is the best way we can keep costs and interest rates down.” Some analysts said the continuing rise in the core inflation figure could nudge the MPC to go even further than forecast on Thursday. “It leaves the Bank of England assured to raise interest rates again tomorrow at its monetary policy meeting and likely to consider a 0.5 per cent rise as opposed to the expected 0.25 per cent increase,” said Stuart Cole, chief macro economist at Equiti Capital. “What is certain is that the UK rate-hiking cycle is far from being close to its end yet, the Bank of England becoming an increasingly outlier compared to both the Fed and ECB where the debate is much more focused on how close we are to seeing the terminal rate.” The “stickiness” of inflation has caused many economists to predict that interest rates will have to rise to 6 per cent by end of this year and remain at high levels for longer than previously forecast. Markets now put the chances of a 0.5 per cent increase in interest rates on Thursday at 40 per cent while there is a 60 per cent chance of rates hitting 6 per cent by December. “The fear is that more rate rises could push some households to breaking point when their fixed-rate mortgages mature and they must absorb significantly higher repayments,” said Alice Haine, personal finance analyst at Bestinvest. “With mortgage costs increasingly taking up a larger share of consumers’ take-home pay, this could have dire consequences for the economy as people restrict their spending to ensure they can meet their household bills.” Many homeowners in the UK can shrug off rising interest rates because they are on fixed-rate mortgages. But analysts say when these short-term deals come to an end, household budgets could face much higher mortgage payments as they are forced to find new deals or more to higher standard variable rates. “It is a ticking time bomb as 1.4 million borrowers will see an end to their low fixed rates this year,” said Jamie Elvin, director at mortgage broker Strive Mortgages. According to Moneyfacts, the average two-year fixed residential mortgage rate on Wednesday is 6.15 per cent, up from 6.07 per cent on Tuesday. The average five-year fixed residential mortgage rate today is now 5.79 per cent. Yesterday, it was 5.72 per cent. Moneyfacts also noted that the number of available mortgage products continues to fall – on Wednesday there were 4,498 residential mortgage products on the market, down from 4,641 the day before. Meanwhile, a Bank of England official said some of the gloom around the UK's housing market was being overdone. David Roberts, chairman of the court of directors at the Bank of England and a former chairman of the Nationwide Building Society, told a parliamentary committee that “some of the press headlines are a little bit over where my own judgment would be about what I think could happen – or quite a lot over”. European stock markets fell on the latest UK inflation data. In London, the FTSE was 0.5 per cent lower while Frankfurt's Dax index lost 0.2 per cent and the Cac 40 in Paris was 0.3 per cent down. In London, the prospects of higher interest rates than previously expected weighed on shares in homebuilding companies, with the likes of Barratt, Persimmon and Taylor Wimpey all more than 2 per cent lower. Even an increase in annual profits by the Berkeley Group failed to halt a 3 per cent slide in the luxury house-builder's shares. “Higher mortgage rates are set to squeeze demand for property though and after the short episode post the mini-budget last year, we're now entering a very dangerous period for the housing market,” said eToro analyst Adam Vettese. The British pound rose sharply for a brief period on the inflation figure but rapidly fell back in morning trade in London.

UK inflation stuck at 8.7%, in blow for interest rate hopes

Headline inflation remained unchanged in May, but core inflation continues to rise