Explainer: Why are Interest Rates not dropping?

Inflation is dropping, interest rates aren't. What gives?

Ludo Lugnani
Ludo Lugnani

With UK inflation hitting the Bank of England's chill 2% target, homeowners grappling with sky-high mortgage rates are scratching their heads, wondering why the BoE isn't rushing to slash its key interest rate.

Here's all you need to know on inflation and why interest rates aren't dropping just yet.

1. What’s the lowdown on UK inflation?

Inflation cooled to a breezy 2.0% in May, hitting its lowest point since the cost of living crisis first crashed the party nearly three years ago. We've seen inflation slowly backpedalling since the end of 2022 as the global supply chain mess and spikes in energy and food prices started to settle down. But the BoE is biting its nails, unsure if this chill vibe will last. Inflation in the services sector is still playing hardball, registering a 5.7% increase last month—ouch, higher than the 5.5% economists were betting on. The word on the street is that overall inflation might jump to 2.4% by year’s end, thanks to those pesky second-round effects.

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