UK interest rates predictions as inflation finally drops to 2% Bank of England target | Personal Finance | Finance


Interest rates could finally drop after the Bank of England’s announced inflation had cut to two percent target.

The monetary policy comittee (MPC) at the central bank had consistently hiked the base rate in efforts to rein in spending and tackle inflation, with the rate held at 5.25 percent in its latest decisions.

But now inflation has fallen to the two percent target set by the bank, opinions are divided as to whether this means interest rates will start to fall.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: „Lower inflation isn’t likely to persuade the Bank of England policy-makers to cut rates this week, and we’re still overwhelmingly expecting them to keep rates on hold. However, over the past week, the chances of an August cut have risen.“

Julian Jessop, economics fellow at the Institute of Economic Affairs, said the latest inflation figures „should make it much easier“ for more members of the MPC committee to back a rates cut – after two members voted in favour of slashing rates at the last meeting.

Chris Barry, director at Thomas Legal, said the bank will remain cautious in its decision making. He commented: „It will be close between reducing rates now or holding a little longer to see if two percent CPI is here to stay.

„Whilst rates are highly likely to reduce, any drastic or large moves would create a huge wave of demand for borrowing and push house prices up further. The country is in a delicate position so don’t expect any surprises.“

Ms Coles said there could be a rates cut in August or September with expectations of two reductions before the end of 2024.

She said: „For those who need to remortgage in the near future, things are still looking relatively miserable, and Moneyfacts figures show the average two-year fixed rate rose from 5.56 percent at the end of January to 5.97 percent this week.

„This is despite pricing in potential cuts later in the year, so we’re unlikely to see significant movement until the market sees more cuts on the cards.“

Peter Stimson, head of Product at the lender MPowered Mortgages, warned that the central bank may be forced to hold interest rates given the current political situation.

He said: „Now CPI [Consumer Price Index] is bang on the bank’s two percent target, the bank’s next step would ordinarily be to start easing the interest rate pain which has made mortgages more expensive for millions of homeowners and would-be buyers.

„But it’s unlikely to do so, as the inflationary block has morphed into an electoral one. While the bank is independent of Government and not part of the civil service, it too is in de factor purdah – and cannot be seen to influence the election.

„The members of its rate-setting committee are therefore unlikely to cut the base rate tomorrow, even if they wanted to.“

Mr Stimson said that another issue complicating the rates cut decision is the latest figures for core inflation.

He commented: „Despite the welcome fall in the headline CPI figure, core inflation remains stubbornly high at 3.5 percent. This is well above the Bank’s target, and its rate-setters will want to see further improvement here before committing to a rate cut.

„So even though mortgage borrowers and lenders are crying out for the base rate to start coming down now, we are likely to have to wait until after the election – and probably until August – before relief finally comes.“

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