Inflation is now down to the two per cent target for two months running. That is lower than the US or the eurozone. Yet the markets think there is, at best, only an even chance of a cut in interest rates when the Bank of England monetary policy committee meets at the beginning of next month. What’s up?

The short answer is that the policymakers are worried that while headline inflation is down, the longer-term forces in the economy still seem to be pushing it back up.

These include the rising cost of labour and the difficulties the service industries have in holding down their costs. But the committee does not operate in a vacuum, and the global movement is clearly for lower rates, with the European Central Bank already having made its first reduction.

So this is a question of when, not whether – and, for what it is worth, the markets think that if the Bank does not cut rates in August, it will almost certainly do so at the following meeting in September.

So, lower rates, yes – but how much lower? That is the burning issue for the swathes of homebuyers coming off fixed-rate mortgages. The Office for National Statistics (ONS) pointed out that more than 1.4 million households had to remortgage last year and, while the number is slightly smaller this year, it was 885,000 in the first nine months of 2024.

For most of those, whatever happens now is too late. They have had to act already, and that is causing huge financial stress. But what is the prospect for the hundreds of thousands next year in the same position?

The cost of those mortgages will be determined by three broad factors. What happens to inflation? What happens to short-term interest rates? And what happens to government bond yields?

They are connected, of course, but as we are seeing here at the moment, the links are pretty elastic. We have got inflation down but nothing yet has happened on........

© iNews