A million UK households face £500 rise in monthly mortgage payments; US inflation drops to 3% – as it happened

A quick thought on the Bank of Canada rate hike from Stephen Brown, deputy chief north America economist:

The Bank of Canada’s 25bp hike today, taking the policy rate to 5.0%, is likely to be the last in this cycle. With the labour market loosening, core inflation declining and the survey indicators implying that inflation expectations are normalising, we expect the Bank’s next move to be a rate cut – albeit not until 2024.

Unlike in June, the decision to hike was correctly anticipated by the majority of forecasters and markets were pricing in an 80% chance of the move. The accompanying policy statement did not provide any explicit forward guidance, but the tone was hawkish. It noted that “while the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy”, while highlighting that strong immigration is initially putting upward pressure on activity and prices before any beneficial effect of reduced labour shortages is felt. Indeed, the Bank reiterated that “with three-month rates of core inflation running around 3½-4% since last September, underlying price pressures appear to be more persistent than anticipated.”

Reflecting those concerns, the Bank upgraded its forecasts for both GDP and inflation in the new Monetary Policy Report. It now expects quarterly GDP growth to average about 1% annualised for the next four quarters, well below the economy’s potential of nearer 2% but significantly better than the consensus forecast of a mild recession. The Bank has pushed back its assumption for when headline inflation will reach 2.0% to mid-2025, although its forecasts for inflation of 2.9% in Q4 2023 and 2.2% in Q4 2024 show it still expects significant improvement before then.

In terms of inflation at least, we think the Bank is taking a glass half-empty approach. Its own surveys imply that capacity and labour shortages have now mostly returned to pre-pandemic norms, while inflation expectations have eased considerably and should continue to decline as actual inflation falls. Despite the Bank’s hawkish bias and continued concern that “that progress towards the 2% target could stall”, we expect a further slowdown in GDP growth and evidence of easing core inflation to persuade the Bank to keep policy on hold over the rest of the year.

Almost 1 million UK homeowners will be forced to shell out at least £500 more a month to cover mortgage payments by the end of 2026, as borrowers suffer the “consequences” of rising interest rates, the Bank of England has warned.

Forecasts released on Wednesday showed that of the 4 million homeowners expected to roll on to new mortgage contracts over the next three years, the majority will be paying up to £220 more a month to cover the mortgage by the end of this year because of the difficulty of finding contracts with comparable rates.

The payments of more than 1 million borrowers are likely to rise by more than twice that amount by the end of 2026.

The UK’s largest banks are strong enough to weather a £125bn financial hit during a severe economic downturn, despite facing mounting stress from rising interest rates, according to the Bank of England.

Price rises for US goods and services hit a two-year low in June, a sign that inflation is continuing to ease as the economy responds to the US Federal Reserve’s rapid increases in interest rates.

Stock markets have rallied on the news, with the Nasdaq and S&P 500 on Wall Street hitting new 15-month highs, while European markets are all up more than 1%.

Our other stories:

The Bank of Canada has raised its key rate by a quarter point to 5%, the highest in 22 years. The move had been expected by economists.

It expects inflation stay around 3% for the next year before gradually declining to its 2% target in mid-2025, six months later than previously thought.

More reaction to the slowdown in US inflation and what it means for interest rates.

Marc Ostwald, chief economist & global strategist at ADM Investor Services International, said:

Increasingly it looks as though a July rate hike may be little more than the Fed erring on the side of doing too much, also an acknowledgement that the June CPI fall was to a Iarge extent base effect driven and the vulnerability to a renewed energy price shock remains ever present.

Nick Chatters, investment manager at Aegon Asset Management, questioned the need for further rate hikes.

We have been waiting for some time for inflation in the US to surprise to the downside, and today it finally did. There have been a multitude of different indicators all pointing to slowing inflation in the US; however, until now, it has remained stubbornly sticky. With the inflation data today coming in below forecast and the employment data last Friday surprising to the downside, why would the Fed hike later this month?

Powell said at the June meeting that the committee sees further hikes this year, which means this month is likely, but will today’s data change their view? I suspect not, but it should. Employment is not as strong as it was and inflation is cooling, rates are over 5%, and painful lags of past hikes are likely still to come. Keeping going because you told the market in the past that you would is not a good rationale for raising rates.

12 Jul 202309.53 EDT

Lauren Aratani

Here is our full story on US inflation:

The prices of US goods and services hit a two-year low in June, a sign that inflation is continuing to ease as the economy responds to the US Federal Reserve’s rapid increases in interest rates.

The latest consumer price index (CPI) figures, which measure the prices of a basket of goods and services, increased 3% over the last year. This was the smallest increase since March 2021 and down from a four-decade high of 9.1% in June 2022 as pandemic supply chain issues clashed with burgeoning consumer demand.

Even though inflation has continued to go down, price increases still remain higher than the Fed’s 2% annual target rate, meaning more interest rate hikes could come.

The tech-heavy Nasdaq and the S&P 500 indices on Wall Street have both hit 15-month highs.

The Nasdaq jumped 170 points, or 1.2%, to 13,932, while the S&P 500 rose 40 points, or 0.9%, to 4,480, their highest levels since April last year.

Economics journalist Holger Zschäpitz tweeted:

Chris Williamson, chief business economist at S&P Global Markit Intelligence said:

The opening bell has rung on Wall Street.

The Dow Jones has climbed 220 points to 34,479, a 0.6% gain, after the better than expected inflation data. US inflation slowed to an annual rate of 3% in June from 4% in May.

Andrew Hunter, deputy chief US economist at Capital Economics, said:

The muted 0.2% month-on-month rise in core consumer prices in June won’t stop the Fed from hiking rates again later this month, but it supports our view that the downward trend in core inflation is set to accelerate over the second half of the year.

The rise in the headline index was also 0.2%, as modest rebounds in gasoline and energy services prices resulted in a 0.6% m/m rebound in overall energy prices. But the sharp downward trend in food inflation continued, with food at home prices unchanged on the month.

Base effects pushed the headline CPI inflation rate down from 4.0% to a 27-month low of 3.0%, as the last of the big rises in energy prices in the first half of 2022 dropped out.

Turning to core inflation, which excludes food and energy costs, he said:

The below-consensus 0.2% m/m rise in core prices, which saw core inflation fall to a 20-month low of 4.8%, is potentially even more encouraging than it looks, as it included a fall of only 0.5% m/m in used vehicle prices – with the wholesale auction data pointing to a cumulative decline of around 9% over the next couple of months. That was still enough to push overall core goods prices down by 0.1% m/m, with widespread declines now developing for imported goods like household furnishings and recreational goods.

The downward trend in shelter inflation continued, with CPI rent rising by 0.5% again but the larger owners’ equivalent rent index up by only 0.4%. There were also signs that gains in core services excluding housing are slowing. Although that was largely due to an 8.1% m/m plunge in airfares, which mainly reflects lower jet fuel prices rather than labour market conditions, it is nevertheless the sector Fed officials are watching most closely as they look for evidence the slowdown in core inflation will continue.

Lisa Abramowicz, who co-hosts Bloomberg Surveillance on Bloomberg TV and radio, noted:

Here in the UK, inflation is running at 7.9%. The Bank of England will be jealous.

Neil Shah, executive director at Edison Group, said:

UK policymakers and the BoE will be looking enviously across the pond as US inflation continues to moderate at a steady pace. The latest headline inflation figures drop by one percentage point, even lower than expected. We are now seeing levels last seen in 2021, and getting ever closer to the Fed’s 2% target. Even core inflation, which has been significantly more stubborn in subsiding dropped to 4.8% in June. Central banks view this as the clearest indicator for rate-setting policy, so the Fed will be relieved to see core prices moving in the right direction.

Nevertheless, core inflation remains high, and [Fed chief Jerome] Powell is likely to continue on his course to squeeze inflation by raising rates at the FOMC’s next meeting. The US labour market remains tight, with high employment numbers and consistent wage rises, while the country’s housing market is showing remarkable resilience – all adding to the expectations of a further interest rate hike in late July. Markets seem to have priced in the newest inflation data, and we don’t expect any major moves as a result of the latest figures.

Financial markets are happy following the US inflation slowdown. The UK’s FTSE 100 index has jumped 118 points, or 1.6%, to 7,397. Stock markets in Germany, France and Italy were between 0.7% and 1.2% higher.

US futures are pointing to a higher open on Wall Street in 45 minutes’ time.

Naeem Aslam, chief investment officer at Zaye Capital Markets, was quick to send us his thoughts.

Cold as ice—that is the number that comes to mind when you look at the US CPI data. This is the lowest number since the pandemic, and this is certainly good news for the economy, but it is important to keep in mind that this is still a transitory situation. But overall, traders are cheering this event, and while futures have moved higher, the dollar index has lost more momentum.

The price for gold has become more interesting and bullish on the back of the US CPI data, as traders don’t expect the Fed to chop more wood now. The bitcoin price has become more interesting as well, and we have seen a jump in prices.

Overall, we think this is the best news for the markets so far this year when it comes to the US CPI data.

NEWSFLASH: Inflation in the US has slowed more than expected to 3% in June, the lowest rate since 2021.

The annual inflation rate fell from 4% in May, according to government figures.

Core inflation, which strips out food and energy costs that tend to be volatile, was also lower than expected at 4.8%, while economists had expected a rise to 5%.

The investor Jeroen Blokland tweeted: