The unexpected dip in inflation – from 3% to 2.8% according to official figures – is unlikely to change the broader outlook on high interest rates, expects say.
Analysts had expected that figure to be 2.9% but even with the larger than expected drop, it remains well above the Bank of England’s target of 2%.
The Bank expects inflation to temporarily rise to 3.7% this year, mainly due to higher energy prices.
Next month prices for the new tax year will come into effect, with bills for energy, water and council tax all set to rise. With measures from October’s budget also expected to push costs up for many businesses, the rate of inflation is expected to now increase again for most of the year.
As a result, few analysts believe the latest temporary drop will alter the landscape for interest rates.
Alice Haine of BestInvest says: “Inflation at 2.8% may be a vast improvement on the peak of 11.1% at the height of the great financial squeeze in October 2022, but the outlook for households is far from rosy. ‘Awful April’ is just around the corner with households expected to absorb a raft of bill and tax hikes from higher energy, water and broadband bills to rises in council tax, car tax and stamp duty.
“The Bank of England expects price increases to peak at 3.75% later this year due to the inflationary effect caused by the tax hike on businesses, along with global uncertainty arising from US President Donald Trump’s trade war. This means interest rates may stay higher for longer as the central bank strives, once again, to keep inflationary pressures at bay, something already evident from its decision to keep the base rate at 4.5% earlier this month – not great news for households weighed down by heavy debts or oversized mortgages.”
Sarah Coles of business consultancy Hargreaves Lansdown adds: “It eases the pressure slightly on the Bank of England, especially given that core CPI (which excludes volatile food and fuel prices) also fell very slightly. However, it doesn’t change the fact that inflation is likely to rise from here, so it’s unlikely to mean a radical rethink by the Bank.
“It has already pledged to stay cautious on cuts in the coming months, and it’s going to stick with the plan. GDP data will also be fresh in its mind, and the fact the economy shrank in January. The Bank won’t want to keep rates too high for so long that growth stagnates entirely. On balance we’re expecting a rate cut in May or June, and a second around September.”
“Despite anticipation of a scaling back of government spending in today’s Spring Statement, this year’s budget is expansionary and will introduce some inflationary pressure” comments Monica George Michail, associate economist at NIESR.
She forecasts CPI inflation will remain above the Bank of England’s 2% target throughout this year, driven by increased public spending, persistent wage growth and global trade fragmentation. “We therefore think there will only be one more 25 basis point interest rate cut in 2025” she adds.
This article is taken from Landlord Today