The odds on the Bank of England announcing an interest rate cut next month cut appear to have lengthened as analysts predicted the 'stickiness' of  service sector inflation would worry policy-makers.

The headline annual rate of inflation remained steady at 2% in the 12 months to June, in line with the year to May and with the Bank of England’s target.

The rate has fallen from 11.1% in October 2022. The fall suggests interest rate rises imposed by the bank to tackle the surge in inflation that started amid the recovery from the pandemic have had the desired effect.

Members of the bank’s Monetary Policy Committee have raised its base rate from 0.1% in December 2021, to 5.25% currently, leaving consumers and businesses facing sharp increases in borrowing costs.

The fall in the headline inflation rate has boosted expectations that the bank will cut interest rates this summer. However, economists said news that the annual rate of inflation for services increased to 6%, from 5.9% in May, could prompt policymakers to sit tight for now.

“Services inflation still looks too high for comfort,” said Dan Coatsworth, investment analyst at AJ Bell. He noted:  “UK stocks took a tumble after components of the latest inflation data lowered the chances of a near-term interest rate cut.”

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Peter Arnold, chief economist at the EY Item Club, noted the 2% headline inflation rate was slightly higher than hoped and said the services category was largely responsible for the apparent “stickiness”.

A rise in the rates charged by hotels and restaurants offset the impact of falls in the price of goods such as clothing and footwear.

Mr Arnold suggested the more hawkish members of the MPC may see the latest data as evidence that their concerns about inflation persistence were well founded.

“The implications for the more dovish members are unclear,” said Mr Arnold, adding: “They might feel that they need to wait for inflation to surprise on the downside before they move.”

The results of the next meeting of the MPC will be announced on August 1.

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At the meeting held in June seven members of the committee voted to keep the bank’s base rate on hold. Two wanted a 0.25 percentage point cut.

The minutes of the meeting say some MPC members felt the fall in the headline inflation rate to 2% was not necessarily indicative of the required sustained return to target.

They note: “Continued high levels of, and upside news to, services inflation supported the view that second-round effects would maintain persistent upward pressure on underlying inflation. Wage growth had continued to exceed model-based estimates.”