General anticipation had been that the rate of inflation would remain steady in June, so the increase to 3.6% is an unwelcome surprise.
That will raise the question of whether it’s enough of a surprise to force the Bank to consider a delay to any further cuts in base rate.
The recent tone has been consistent in its suggestion that interest rates should continue to fall but it’s been harder to be sure when those cuts may come, when data doesn’t follow the expected path.
The Bank’s focus is on reducing the rate of inflation to its target of 2% but it may see enough reason to look through today’s figures to reduce rates in the August meeting.
Many economists will suggest that inflation should still ease over the course of this year and that weak economic growth and a potentially looser labour market leaves the path open to rates continuing the downward trajectory.
Mortgage rates have been reflecting the market’s confidence in more cuts to come, as lenders have been quick to take advantage and trim back fixed rates.
Lenders have been locked in an attritional rate battle that has seen frequent albeit small reductions made to fixed rate mortgage pricing.
Today’s news could take a bit of momentum out of those reductions but may not be enough to make a major reversal in those mortgage rate improvements.
However, with recent changes in regulatory approach, lenders will have more flexibility when offering higher multiple mortgages and that is already feeding through into lender criteria.
That and the promise of further rate cuts should still give mortgage borrowers room for optimism but today’s unexpected data is a reminder of just how hard it is to second guess where rates may head.
David Hollingworth is an associate director at L&C Mortgages
