A blow to borrowers as hopes of a summer interest rate cut fade despite falling inflation

Hopes of a summer interest rate cut faded further yesterday, despite inflation falling to the 2 percent target for the first time in almost three years.

The Bank of England is widely expected to leave rates unchanged when officials meet today.

And despite the buzz caused by yesterday’s inflation figures, markets are increasingly confident that they will remain at the same levels at their next meeting in August.

That is likely to disappoint millions of borrowers after the Bank – led by Governor Andrew Bailey (pictured) – strongly hinted earlier this year that a summer interest rate cut was planned.

Data from the Office for National Statistics (ONS) shows that consumer price index (CPI) inflation fell to 2 percent in May, down from 2.3 percent in April.

It means Britain has beaten both the eurozone and the US in the race to reduce inflation.

In the single currency this is 2.6 percent and in America it is 3.3 percent.

Prime Minister Rishi Sunak said this was proof his economic policies were working and urged voters not to ‘risk all that progress with Labour’.

But despite the inflation target being met, markets see a 95 percent chance that rates will remain unchanged today.

And the chance of a cut in August has been reduced to less than 30 percent.

Instead, traders are betting that the Bank’s first move will come in September, with a further cut likely by the end of the year.

This is because inflation in the services sector – which interest rate setters say they keep a close eye on – appears to be more difficult to bring down than nominal inflation.

At 5.7 percent in May, this was higher than economists expected.

The Bank also predicts that the headline CPI will rise again later this year. The country is also wary of strong wage growth – of 6 percent – ​​which could fuel further price increases.

Yet meeting the 2 percent inflation target – for the first time since July 2021 – still marks a turning point after a prolonged crisis, when inflation rose to more than 11 percent in autumn 2022.

This was fueled by the Russian invasion of Ukraine, which caused energy and food prices to rise.

Food inflation had reached a staggering 19.2 percent in March last year, but has fallen to 1.7 percent, the lowest level since October 2021.)

Deutsche Bank economist Sanjay Raja said: ‘The UK has won the race to get the CPI back to target – even if only temporarily.

While calls for an upcoming rate cut will increase given the decline in the CPI to 2 percent, there are also likely to be growing concerns about the persistence of services inflation.’

Today’s decision will be particularly closely watched because rate-setting officials, who normally communicate their ideas to the markets through regular speeches, have been silent since the general election was called.