Wed, 16 Jul 2025

Wed, 16 Jul 2025 Faisal Islam: Surprise inflation jump complicates interest rate decision

Higher inflation could give the Bank of England pause for thought over cutting interest rates.
Inflation has risen faster than expected, staying above the Bank of England's target level until autumn. This development has caused uncertainty and renewed caution among investors who were previously expecting interest rates to be cut in August. A former rate setter at the Bank has described cutting interest rates as "irresponsible" given the current rise in inflation. The Bank will need to explain its decision to look beyond the current increase in inflation, which is expected to drop back to 2% next year. The deliberations will consider factors such as the UK's potential for higher inflation due to increasing wage and tax costs, a weakening jobs market, and the impact of energy price falls. The latest employment figures are expected to show a continued fall in vacancies, which could strengthen the argument for cutting interest rates. However, other major economies have not seen a similar bounce in inflation, with the eurozone's rate at just 2%. Growth is slowing, but it is not considered a recession yet. The economy contracted in May for the second month in a row, adding to pressure on the Chancellor. The rise in inflation has raised questions about the UK's economic resilience and its ability to manage rising day-to-day spending pressures.
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