Interest rate cut hopes dampened

PROSPECTS FOR further interest rate cuts weakened this week after inflation hit an eight-year high.

Analysts and the Bank of England were caught by surprise when July figures showed inflation rising sharply from 2% to 2.3%.

The bank’s target is 2%.

Mark Berrisford-Smith, senior economist at HSBC, said this would not have been considered so worrying if rising fuel costs were solely to blame and the increase was seen as a one-off.

But inflation was hitting other sectors as well. “Services are up 5% and goods prices, which are often negative, were up 5%.”

Mr Berrisford-Smith said this month’s decision by the Bank of England’s monetary policy committee to cut rates 0.25% to 4.5% was also by a narrower margin than expected.

“It was only a 5-4 vote. If they had had these figures then I’m not sure they would have voted to cut.”

Significantly, Bank of England governor Mervyn King was one of those who voted to maintain rates at 4.75%.

HSBC was still tentatively predicting one further cut in interest rates this year, said Mr Berrisford-Smith.

Although if inflation was in the range 2.5%-3% by October this was unlikely and there might even be pressure to reverse July’s cut, he added.

That would be bad news for farmers forced to increase their borrowings as cover for their delayed single farm payments.

And Mr Berrisford-Smith said it could also further strengthen the value of the pound against the euro, which would reduce the value of the SFP when it eventually arrived.

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