Money market traders are betting there is a 45% chance that the base rate will be cut by 0.25% next month, following the first rise in inflation this year.
Overall, general prices rose by 2.2% in the year to July, slightly above the Bank of England’s target of 2% where the rate had been since May.
However, an increase had been taken into account by most models as the prices of gas and electricity were expected to fall by less than they did a year before.
The data also saw closely-watched services inflation fall more sharply than forecast from 5.7% to a two-year low of 5.2%.
This has left traders arranging positions around a slightly less than even chance that the Bank of England will cut rates at its September meeting to 4.75% from its current level of 5%, after the first rate cut by the central bank in four years earlier this month.
This leaves a 55% chance that borrowing costs will be unchanged next month.
Before this morning’s inflation data, a September rate cut was only a 36% probability, according to City pricing.
However, markets are strongly pricing in two cuts over the Bank’s next three meetings this year, betting on an 82% chance of such an outcome before the latest inflation figures were published this morning.
Capital Economics forecasts that fading services inflation will mean rates fall to 4.5% by the end of this year and 3% next year.
L&C Mortgages associate director David Hollingworth adds: “Mortgage borrowers have been buoyed by the base rate cut at the beginning of August.
“Mortgage rates had already been edging down but the Bank’s cut came earlier than many had expected and has helped to drive down costs for lenders.
“In a cutthroat market, rates have already tumbled further with a clutch of big lenders now offering five-year fixed rates below 4%, levels not seen since much earlier in the year.
“That direction of travel is unlikely to be disturbed by reaction to today’s news and the market will have been well prepared for an increase.
“Instead, we’re likely to see continued and frequent movements in mortgage rates, as lenders continue to adjust and improve where they can.”
