The Bank of England is predicted to keep UK interest rates at 4.25% on Thursday amid rising food inflation and the threat of surging oil prices pushing up the cost of living.
Most economists think the Bank of England’s Monetary Policy Committee (MPC) will opt to keep rates on hold when it meets on Thursday.
The MPC has voted to cut rates at every other meeting since it started easing borrowing costs last August, from a peak of 5.25%.
This has been possible while the rate of UK inflation has been steadily falling from the highs reached in 2023, at the peak of the cost-of-living crisis.
Interest rates are used as a tool to put a lid on unruly inflation, in line with the Bank’s task of keeping the rate of Consumer Prices Index (CPI) at 2%.
However, rising food prices have been putting pressure on overall inflation recently, with the latest data from the Office for National Statistics (ONS) showing food and non-alcoholic drink prices rose by 4.4% in the year to May.
This was the highest level in more than a year, with items like ice cream, coffee, cheese and meat spiking last month.
Chocolate prices soared by nearly 18% annually, a record jump for the confectionery.
The overall CPI rate came in at 3.4% in May, slightly higher than the 3.3% rate most economists had been expecting.
Monica George Michail, associate economist for the National Institute of Economic and Social Research (Niesr) said the institute was forecasting inflation to remain above 3% for the rest of the year amid “persistent wage growth and the inflationary effects from higher Government spending”.
“Additionally, the current tensions in the Middle East are causing greater economic uncertainty,” she said.
“We therefore expect the Bank of England to keep rates on hold this Thursday and implement just one further cut this year”.
Sandra Horsfield, an economist for Investec, said the Bank of England is likely to be encouraged by services inflation dropping to 4.7% in May, from 5.4% in April.
This could indicate that higher employer national insurance contributions, which rose in April, have not been passed onto consumers to the extent that policymakers had feared, she said.
But Ms Horsfield said “other uncertainties remain, not least with respect to US tariffs and the indirect impact this will have on UK firms”.
“The risk to energy prices has clearly intensified and moved up the agenda given developments in the Middle East,” she said.
“It seems unlikely the MPC will want to change policy rates this week.
“But we think Wednesday’s data keep another rate cut at the subsequent MPC meeting in August firmly on the table.”
