Even though inflation has fallen, traders bet against a summer rate cut

Looming election and higher-than-predicted price rises push expectations back to November

Investors are pushing back the expectation of a rate cut in this summer, even though Rishi Sunak has hailed an inflation drop as a major moment for Britain.

According to the Office for National Statistics, prices rose by 2.3pc between April and the previous year. This is down from the 3.2pc rate in March, and represents the lowest level of inflation since 2021.

Prices rose more than the Bank of England and analysts predicted, causing homeowners to suffer even more.

Just hours before , he announced that a snap election would be held on July 4, the Prime Minister stated that the decline in the headline interest rate was clear proof the Tories “plan” is working.

Gas and energy prices are expected to continue falling, bringing inflation closer to the Bank’s target of 2pc next month.

But economists say that the impending election makes a rate reduction next month almost impossible.

Since 1997, when the Bank became independent, it has never reduced interest rates during the last weeks before an electoral campaign.

Analysts have said that a decision made ahead of the 4 July election would be viewed as “politicised”.

The Bank is expected to begin cutting interest rates in November. Previously, traders had predicted a 50% chance that the Bank would act by June.

Sunak said that despite the inflation figures being higher than expected, prices were “back to normal”. Sunak announced the date of the elections and said that the “hard-earned economic stability” was just the beginning.

On the steps of Downing Street he said, “The question is now how and whom do you trust to transform that foundation into a secured future for you and your family, and our country.”

Threadneedle street was urged by a number of Tory MPs to begin reducing interest rates, which had reached a record high of 5,25pc after 16 years.

Harriett Bliak, Tory chairwoman of the powerful Treasury Select Committee said that the Bank would “certainly” reduce its base rate during its next meeting, scheduled for June 20.

She said: “Now, that inflation has returned to its target range, I repeat my belief that the independent Bank could have cut rates by one notch at the meeting in May and that they should definitely cut base rate at their June meeting.”

Sir Jacob Rees Mogg, former business secretary added: “Interest rate cuts should have already been made as inflation is a lagged indicator.”

Threadneedle Street is closely monitoring the services inflation rate, but it could prove to be a major stumbling-block. It fell to 5.9pc from 6pc, which was higher than the Bank’s 5.5pc forecast.

The ONS said that this was due to the rise in hotel and restaurant prices, and the rise in household bills like broadband and mobile bills.

The BBC TV license fee was also increased by 6.6pc to £169.50, the first increase since 2021.

Simon French, Panmure Gordon’s chief economist, said that a rate cut in June would be an outside chance after April’s inflation data, which showed persistent pressures on the services sector.

The general election could make it even less likely that the MPC would cut rates on June 20, as the decision might be viewed as partisan.

Gas and electricity prices have fallen, which is what has caused the April drop in consumer price index (CPI).

On April 1, the typical dual fuel energy bill fell 12pc to £1,690 per year. This represents a reduction of around 0.4 percentage point.

The Ofgem cap on energy prices is set to be further reduced, pushing inflation towards the 2pc target. This will keep wages rising in real terms even as voters go to the polls.

The election has also been said to have put on hold hopes for a NatWest share sale in the style of ‘tell Sid.’

ONS data show that core inflation, which excludes volatile energy and food prices, has also dipped more slowly, to 3.9pc, in April. This is down from 4.2pc over the past year.

Core inflation remains high

Capital Economics’ Paul Dales said: “This indicates that the persistency of domestic inflation is fading faster than the Bank had anticipated.”

The Bank anticipates that inflation will rise to around 2.6% in the second half this year, then fall to the target rate at the beginning of 2026.

Statisticians noted that the price of goods fell for a first time since February 20, down 0.8pc from a year earlier.

Grant Fitzner noted that the ONS chief economist, Grant Fitzner also noted a decrease in food prices. The prices in supermarkets increased by 2.9pc over the past year, compared to a 20pc increase just a little more than a year earlier.

Fitzner, however, said that the recent price increases had been painful to many households. He told BBC: “Food prices have increased by almost a quarter in the last two years.” People are still feeling it.”

Fitzner added that there are “more positive aspects” to the economic picture, adding: “While wages have held steady at 6pc, inflation has fallen quite quickly in recent months.”

There are signs, however, that the price pressures in certain areas of the economic system remain stubborn.

The rate of inflation peaked in October 2022 at 11,1pc, but the falling price of energy has helped to bring it back down to more normal levels.

Rachel Reeves said that now is not the time for Conservative Ministers to pop champagne corks or take a victory lap.

Ms Reeves said: “Prices have skyrocketed in shops, mortgages have increased and taxes have reached a seventy-year high.”