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The Bank of England has raised interest rates by 0.25 percentage points to 5.25 per cent, slowing the pace of increases amid signs persistently high inflation is beginning to ease.
Inflation fell more than expected in June, and most economists had expected a quarter-point increase after the central bank had raised rates by half a point at its last meeting.
Despite the decline in inflation, prices in the UK are rising at a faster pace than in other advanced economies such as the US, Japan and the eurozone, where hopes are rising that interest rates are close to a peak.
UK prime minister Rishi Sunak, who has set a goal of halving inflation by the end of 2023, told LBC radio on Wednesday it was not falling as fast as he would like, but added Britons “can see light at the end of the tunnel”.
The latest official data showed consumer prices rose 7.9 per cent in the year to June, down from 10.1 per cent at the start of the year.
People appear to be gaining confidence that inflation will slow in the coming months. A survey published by Citi on Wednesday showed public expectations for inflation in 12 months’ time had fallen from 5 per cent in June to 4.3 per cent in July — a finding that points to a potential easing of workers’ demands for higher wages amid the cost of living crisis.
Michael Saunders, a former Monetary Policy Committee member now advising the consultancy Oxford Economics, said the impact of higher interest rates on households had been “slower and smaller” than in the past because fixed-rate mortgages were more common, homeowners had larger savings and fewer had a property loan.
But he added the economy would still face a “powerful delayed monetary tightening” as fixed-rate mortgages expired.
Additional reporting by Tommy Stubbington in London
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