Inflation 'at its peak' – but expect further hefty rate cuts

Published on Tuesday 14 October 2008 21:52

BORROWERS can expect a further sharp cut in interest rates before the end of the year despite inflation rising to a 16-year high last month.

Analysts yesterday predicted that the cost of living may well have peaked and central bank policymakers would now be focused on preventing a deep recession following the current financial turmoil.

Official figures, released yesterday, showed the Consumer Prices Index (CPI) hitting 5.2 per cent.

The rise from 4.7 per cent in August was underpinned by soaring utility bills.

However, food prices eased back from their summer highs, prompting many economists to say inflation would now retreat.

Jonathan Loynes, chief European economist at Capital Economics, said: "September's figure will be the peak in inflation and the key issue now is just how far it will drop back. Needless to say, steep falls in inflation will help to restore households' spending power and allow the monetary policy committee to cut interest rates very sharply."

Last week, the Bank of England announced a surprise half-point cut in rates to 4.5 per cent as part of a co-ordinated effort by global central banks.

Loynes said he expected rates to drop to 2.5 per cent or less.

Howard Archer, chief UK economist at Global Insight, said consumer price inflation was "now at its peak, or very near to it".

He added: "We expect interest rates to be cut by at least another 50 basis points (half point] before the end of the year, very possibly as part of further co-ordinated central bank action.

"The timing and extent of further interest rate cuts will be heavily influenced by financial crisis developments and the extent to which these are hurting economic activity."

The Office for National Statistics said electricity prices were 30.3 per cent up on the year and gas prices were almost 50 per cent higher.

However, food inflation, another key source of price pressure this year, eased to 12.7 per cent from 14.5 per cent as the cost of dairy products fell.

The RPI measure of inflation, often used as a benchmark in pay talks, rose to 5 per cent from 4.8 per cent in August.