Interest rates: Bank of England warns surging food prices could push inflation to 4%

This encourages people to spend and so increases the rate of inflation.

There is no such thing as a free lunch, or, in this case, a free Christmas dinner.

Even as he unveiled an interest rate cut that will be hailed as good news for millions of mortgage-payers, the governor of the Bank of England warned that the institution forecasts inflation will continue to rise, especially food inflation.

While inflation overall is predicted to peak at 4 per cent in September, food inflation will continue to rise to 5.5 per cent between now and Christmas.

The figures will also come as a blow to the chancellor – just days after she was warned she faces a £50bn black hole in the government’s finances.

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The number of complaints about financial firms where the ombudsman was called on to step in has fallen to its lowest level in more than a year, with fewer gripes recorded about issues such as perceived unaffordable lending and fraud.

Between April and June, it received 10,000 new cases related to perceived irresponsible and unaffordable lending – less than half of the 21,600 complaints received a year earlier.

Similarly, the most complained-about issue it is currently seeing – motor finance commission – also saw a drop in complaints, from 36,000 cases between January and March to 21,500 cases processed between April and June.

Bank governor Andrew Bailey said: “There are different camps who think where the neutral rate would be.

“I still think the path is downward for interest rates. But there is genuine uncertainty about the course of that direction.

“The path has become more uncertain because of what we’re seeing: we’re seeing an upside risk with inflation, but we’ve got a downside risk with the weaker labour market story. We’re balancing that.

“I certainly haven’t changed my view on the direction of the path, it’s more a question of what time it takes.

“Higher food inflation has contributed to overall inflation – we expect this to be about 4% in September. There are good reasons to think this rise in headline inflation will not persist,” he said.

John Dentry, of the UK’s Current Account Switch Service, has underlined the need for people to take stock of their financial situation and ensure their cash is in an account giving them as high a rate of interest as possible, even after that limit was lowered today.

“The Bank of England is cautiously trying to encourage economic growth. High levels of inflation have certainly complicated the picture, but reviving the economy is clearly a priority this time round,” he said.

“While these moments are big for the market, for consumers, its important to remember that the Banks are filled with plenty of smart analysts predicting what might happen to the base rate. This means they usually ‘price-in’ a cut before it happens, which is why you’ve likely seen mortgage and savings rates gradually fall throughout the year.

“A lot of people only look at their bank account options when rates are going upwards. Now that they’re coming down, it’s just as important to ensure your bank fits your financial priorities.

“There are lots of fantastic options out there, so make sure you’re constantly reassessing your provider and finding the perfect home for your cash.”

On raised GDP expectations, Andrew Bailey explains there’s no major update in overall Bank of England view on the UK’s economic prospects, but that figures pushed higher simply reflects data received over the past few months.

“That’s all on data releases we’ve had. There really isn’t much of a change in our GDP profile – the change is to capture data rather than a change in view, it’s just incorporating changes which aren’t very big,” he said.

“It’s a very small change in the forecast compared to previously,” adds fellow MPC member Clare Lombardelli.

Andrew Bailey says there’s more uncertainty over where interest rates go from here, but he still believes it will ultimately be downwards.

“There are different camps who think where the neutral rate would be. I still think the path is downward for interest rates. But there is genuine uncertainty about the course of that direction,” he says.

“The path has become more uncertain because of what we’re seeing: we’re seeing an upside risk with inflation, but we’ve got a downside risk with the weaker labour market story. We’re balancing that.

“I certainly haven’t changed my view on the direction of the path, it’s more a question of what time it takes.

“My vote was not motivated by concerns over risks for a recession.”

The Bank of England report shows that two votes were needed today to cut the interest rates.

The MPC has nine members; initially four voted in favour of a cut: Andrew Bailey, Sarah Breeden, Swati Dhingra and Dave Ramsden.

Four members – Megan Greene, Clare Lombardelli, Catherine L Mann and Huw Pill – then preferred to maintain the Bank Rate at 4.25%.

And one member (Alan Taylor) preferred to reduce Bank Rate by 0.5 percentage points, to 3.75%.

The second vote therefore was required, with Mr Taylor then opting for a 0.25 percentage points cut and a 5-4 swing to do so.

Mr Bailey continues: “Inflation returns to 2% in September 2027 in our main projection and remains there thereafter.”

However, the governor highlights risks including global trade tariffs which can impact this – and even warns of the potential to fall below the 2% target.

“Economic growth is subdued and consumption growth may take longer to pick up – that can lead to inflation falling below 2% in the months ahead.

“We will do what it takes to return inflation to 2 per cent target. Based on the outlook, a gradual and careful approach remains appropriate.”