bank of england inflation base rate

Inflation is down to 2% target but will interest rates be cut?

Despite the fact that inflation has now reached the 2% target for the first time since July 2021, most experts aren’t optimistic for an interest rate cut.

Yesterday, it was announced that the consumer price index (CPI) had finally hit the country’s 2% target that it had been striving towards for almost three years. This will be welcome news for many consumers, who may notice less steep price rises than we had been experiencing in recent times.

However, many in the property market will have been hoping that another big cost could also be about to fall: mortgage rates. These have been creeping up once more in recent weeks, meaning bigger bills for borrowers who are taking out mortgages at the moment.

The Bank of England has often indicated that it will drop its base rate – which has remained at 5.25% since August last year – once inflation comes down. However, it seems that despite the latest good news in inflation levels, the chances are that today’s announcement will not be the news many had hoped for.

Inflation has numerous measures

One of the reasons that the latest inflation results may not automatically equal an interest rate cut is that there is more to it than just the CPI.

Many economists are pointing towards the fact that services inflation has not achieved its target – it was predicted to fall to 5.5% in the latest measure, but only slowed to 5.7%. According to Thomas Pugh, economist at RSM UK, services inflation is a better measure of underlying price pressures in the economy.

The fact it has not fallen as much as expected will, he says, “raise concerns” for the Monetary Policy Commission, making a cut in interest rates less likely for now.

However, he does anticipate a fall ultimately, adding: “We expect inflation to fall below 2% in June, setting the stage for the MPC to cut interest rates in August.

“Inflation is likely to average a little above 2% for the rest of the year giving the Bank plenty of room to deliver rate cuts.

“Our base case is still for interest rates to finish the year at 4.5%, but the risks have clearly shifted to fewer cuts this year.”

Politics plays a part

Inflation aside, there is also speculation that the Bank of England will not choose this month to announce any changes to interest rates, and will instead hold off until after the general election.

The reason for this is that the Bank of England can’t be seen to show any sort of political bias, and while this wouldn’t directly be the case, it could inadvertently send the message of support to the Conservatives; showing that the economic situation has improved “on their watch”.

Analysts at AJ Bell have said: “Governor Andrew Bailey and his colleagues on the MPC may not wish to act in any way that could be seen as favouring one political party over another in the run-up to July’s poll.”

“Homeowners held to ransom”

For mortgage-holders, a cut to interest rates and therefore mortgage rates cannot come soon enough. Although rates and product offerings have certainly improved since their peak last year, the fact that rates have been edging up again, albeit slightly, could still have an impact on the market.

Paula Higgins, chief executive of HomeOwners Alliance, is urging the Bank of England to cut rates now in light of the latest inflation announcement, and to “stop holding homeowners to ransom”.

Inflation is no longer running at 10% – it’s almost at its 2% target,” she said. “And yet the Bank of England continues to use it as an excuse to keep interest rates at the current 16 year high. We think it’s unacceptable that homeowners are held ransom by the Bank of England in this way.

Signalling that rate cuts are on the horizon is not enough. We’ve been hearing that since March. Homeowners’ best-laid financial plans are on hold as they bear the brunt of the Bank of England’s monetary experiment. We cannot see any justification for this continuing.

The burden is too heavily borne by mortgage borrowers. This is why we’re calling on the Bank of England to stop this attack on homeowners and drop the base rate this Thursday.”

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