The Bank of England has given its strongest signal yet that interest rates could be cut as early as September, after inflation fell to 1.8 per cent — below the Bank's 2 per cent target for the first time in three years.

Governor Andrew Bailey, speaking at the Mansion House dinner, described the current monetary landscape as "encouraging but fragile," cautioning that geopolitical risks and energy price volatility could reverse the trend. Markets responded immediately, with sterling falling 0.3 per cent against the dollar.

The Monetary Policy Committee voted 7-2 to hold rates at 4.25 per cent, but the accompanying minutes revealed that several members considered an immediate cut. Economists at Goldman Sachs and Barclays both revised their forecasts, now predicting a 25 basis point reduction in September.

For mortgage holders, the news offers cautious optimism. The average two-year fixed rate has already fallen from its peak of 6.8 per cent to 4.9 per cent, and lenders are expected to compete aggressively if the Bank signals further easing.

The broader economic picture remains mixed. GDP growth of 0.3 per cent in the last quarter beat expectations, but productivity continues to lag pre-pandemic levels. The labour market, while resilient, shows signs of cooling, with vacancy rates declining for the eighth consecutive month.