Shock inflation drop eases interest rate pressure

Posted on 14 August 2007

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The rate of inflation dropped sharply in July, surprising many economists and increasing the likelihood that interest rates have peaked.

The Consumer Price Index (CPI) rate of inflation slowed from 2.4% in June to 1.9% in July, below the Bank of England’s target of 2% and the lowest rate since March 2006. Retail Price Index (RPI) inflation, which includes mortgage interest payments, also slowed significantly, from 4.4% to 3.8%.

The Office for National Statistics, which publishes the inflation data, said that the slowdown had been led by cheaper grocery prices in supermarkets.

Speaking to the Telegraph, analyst Howard Archer of Global Insight said that the news was a “massive surprise” for many, probably including the Bank of England, which indicated only last week that the bank rate would rise to 6% in the coming months.

“This will boost expectations that interest rates have peaked at 5.75 per cent, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates, for now at least,” he said.

Category: Mortgages, Personal finance

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