The Bank of England is poised to push interest rates to 5.25% on Thursday as it tries to bring down inflation with a 14th consecutive increase in the cost of borrowing.
Amid government concerns that cost of living pressures are proving persistent, the Bank is likely to push rates up by 0.25 percentage points to a fresh 15-year high.
The consumer prices index (CPI) fell last month, but remained well above most industrial nations at 7.9% and almost four times the Bank’s 2% target.
Speculation that the monetary policy committee (MPC) will take a tougher stance and increase rates by 0.5 percentage points is a minority view in the City, according to a poll of economic analysts.
But fears that the UK economy is suffering a slowdown in activity in response to higher borrowing costs means the MPC’s next moves will be cautious, analysts said.
UK property prices are falling at their fastest rate since 2009, according to the Nationwide, while homeowners are increasingly signing up to longer mortgage terms to cope with higher monthly bills, according to housebuilder Taylor Wimpey.
The company said market conditions weakened between April and June as interest rates climbed. The average two-year fixed residential mortgage rate is 6.85%, while the five-year rate is 6.37%, according to Moneyfacts.
Business surveys have shown private sector activity slowing across the UK and most of Europe as millions of consumers and businesses struggle to cope with the extra costs of borrowing.
A fall in demand for exports, especially from the Asia-Pacific region and China, has also hurt the UK’s manufacturing industry, which recorded its worst month of the year in July.
A closely watched gauge of the factory sector dropped to its lowest level in 2023, and its joint-worst since May 2020, continuing a year-long slump for the industry.
The S&P Global/CIPS UK Manufacturing PMI fell to 45.3 in July, showing a sharper downturn than in June.
Taking part in a radio call-in hosted by LBC, the prime minister, who has promised to halve inflation from above 10% by the end of the year, said: “I know families are struggling with the cost of living and that’s why I set it out as my first priority to halve inflation, and we’re making progress.
“Is that as fast as I’d like? No. Is it as fast as anyone would like? No.
“But the numbers most recently that we had show that we’re heading in the right direction, inflation is coming down, and I think people can see light at the end of the tunnel.”
Labour accused Sunak of “economic mismanagement” for failing to heed warnings that debt interest costs would balloon in response to rising Bank of England interest rates without a change of policy.
