Base Rate cuts less likely as food inflation rises

Food inflation has increased for the fourth month in a row, throwing any expectations of further Base Rate cuts into serious doubt.

Data from the British Retail Consortium has shown that food prices are once again on the rise, surpassing the 2.6% annual food price rate increase in April.

Considering the Bank of England (BoE)’s cautious approach to managing interest rates, economic analysts have predicted that the Monetary Policy Committee (MPC) may hold off on further Base Rate cuts, so that they don’t risk rocking the boat on inflation.

Is ‘disinflation’ working?

Inflation has been the primary focus of the MPC. Their gradual reduction of the Base Rate since summer 2024 has been part of a carefully coordinated disinflation strategy. On the one hand, the BoE aim to nurture the economy back to a pre-pandemic (and pre-2022 mini-budget) state, but on the other, they are very keen not to let inflation get out of control again.

Despite the MPC’s best efforts, inflation remains in a rubbery state, constantly bouncing back against the policymakers’ efforts to contain it.

The BoE chief economist Huw Pill has been open in his opinion that the MPC has been too hasty in cutting the Base Rate.

Pill disagrees with the quarterly schedule of cutting the Base Rate by 25 basis points, which has been implemented since August 2024. In hindsight, he believes that the decision to start cutting so early was a mistake. Speaking at a Barclays briefing, he said:

My starting point is that the pace of bank rate reduction should be ‘cautious’, running slower than the 25 basis point per quarter we have implemented since last August.

In their report on the UK economy, a representative from the International Monetary Fund (IMF) was more sympathetic to the MPC’s current strategy:

The pickup in inflation that began in 2024 is expected to last through the second half of this year, with a return to target later in 2026 as underlying inflationary pressures continue to recede.

Although monetary policy calibration has become more difficult due to still-weak growth, the temporary rise in inflation and high long-term interest rates, staff sees the BoE’s gradual pace of easing as appropriate.

Given the elevated uncertainty, the MPC is encouraged to retain flexibility to adjust the monetary stance in either direction if needed.

Lenders ahead of the curve

You may have seen in the media that the tone of expectation has now changed significantly. The Independent ran with a headline that sums up the current position “It’s all over for interest rate cuts – get your new mortgage deal now”.

The Base Rate is only expected to be cut once more this year, and mortgage lenders are way ahead of the track on that, as they plan their pricing around Swap rates which indicate the future of the money markets.

As a property investor, it’s time to forge ahead. Contact our team to discuss available deals.