UK's fightback begins here, says HAMISH MCRAE

That’s the tops. That rise of bank rate to 4 per cent will be the top of the cycle – and sticking my neck out even further, I reckon the next move will be a 0.25 per cent cut in November.

Why so confident? Well, there are a host of things that can go wrong through the summer, and let’s hope that the global outlook turns out to be towards the more favourable end of the scale.

First, the markets approved. The FTSE 100 index going through an all-time high on Friday blew a raspberry at the Bank of England’s still dire predictions about the UK economy, and that took the headlines. About time too, I say.

But I thought the response of the gilt market on Thursday to the 4 per cent decision of the Bank of England was actually more significant. Gilt yields fell by a stunning amount. The benchmark ten-year yield at Wednesday’s close was just over 3.3 per cent. By Thursday evening it was down to 3 per cent – indeed it dipped below 3 per cent briefly in afternoon trading.

In an ideal world what the markets think should not be so important, but since we have a fiscal deficit of around £160 billion and have to borrow from the markets to finance it, keeping them onside matters a very great deal.

Second, we don’t actually need higher rates to curb inflation, for they are doing the job already. Some of our inflation is imported, some home-grown. Interest rates don’t have much impact on imported inflation except insofar as they influence the exchange rate. Headline CPI is a bit higher than in most (not all) other countries because we use a lot of gas and import a lot of food, prices of which shot up last year. But now the wholesale European gas price is already below where it was a year ago and food prices are expected to ease back through the coming months.

So this imported inflation will go into reverse, quite possibly by enough to pull down headline consumer prices to 2 per cent by the end of the year. (The Bank of England thinks they will take longer to get there, but agrees on the trend.)

But while our interest rates do not affect import prices, they do have a profound impact on home-grown inflation, though with long and uncertain lags. Rates are already clearly high enough to check the housing market, which turned down three or four months ago. 

Source of data and images: dailymail