What does falling inflation mean for future Bank of England rate hikes?

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Falling Inflation Eases Pressure on Future Bank of England Rate Hikes

British inflation decreased to 7.9% in June, marking its slowest pace in over a year and significantly below economists' forecasts of 8.2%. This development is expected to reduce the urgency for the Bank of England (BoE) to implement aggressive interest rate increases, with investors now anticipating a more moderate 25-basis point hike next month rather than a larger 50-basis point rise. The peak Bank Rate may also not reach the previously priced-in 6%.
Inflationary Pressures Show Signs of Abatement

The overall consumer price inflation rate in June fell to 7.9%, down from 8.7% in May, and matched the BoE's own projection for the month. This slowdown is a positive indicator, particularly as it moves away from the 41-year high of 11.1% reached in October. While still considerably above the BoE's 2% target, the declining trend offers some relief.
Core Inflation and Specific Sectors Moderate

Core inflation, which excludes volatile items like food and energy, also declined more than anticipated, dropping to 6.9% in June from 7.1% in May. Furthermore, the annual inflation for food and non-alcoholic drinks slowed to 17.3%, down from 18.3% in May, although it remains a significant burden for households. Services price inflation also saw a slight decrease, rising by 7.2% annually compared to 7.4% in the previous month.
Reduced Expectations for Aggressive Rate Hikes

Following the release of the inflation data, market expectations for future interest rate adjustments by the BoE have shifted. Investors have scaled back their bets on substantial rate hikes, with a 25-basis point increase in the near future now considered more probable than a 50-basis point hike. The prospect of the Bank Rate reaching a peak of 6% is also no longer fully factored into market pricing.
Broader Economic Indicators Reflect Slowing Price Growth

Beyond consumer prices, other economic indicators also suggest a weakening inflationary environment. Factory gate price inflation, a measure of prices at the producer level, rose by a mere 0.1% in the 12 months to June, the weakest reading since December 2020. Concurrently, manufacturers' input prices experienced a decline of 2.7%, the most significant fall in nearly three years, indicating reduced cost pressures within the production chain.

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What does falling inflation mean for future Bank of England rate hikes?

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