Inflation set to fall – but interest rates should hold steady
- The Office for Budget Responsibility says inflation is likely to fall to 2% in the second quarter of this year. We expect movement in this direction next week.
- But the Bank of England says that after this, inflation is likely to rise again for the rest of the year.
- The market expects the Bank of England to cut rates in June and to end the year at 4.2%.
- Both wages and savings rates are currently ahead of inflation.
Inflation figures for February will be released on 20 March, and the MPC will reveal its rate decision on 21 March
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ”We’re on a downwards escalator, with another drop in inflation expected, and an accelerated move lower forecast for the months to come. But Bank of England policymakers are still set to hold their position, and grip on to higher interest rates. They will want more evidence that wage growth will ramp down further before they budge and bring in a rate cut.
The Office of Budget Responsibility, the government’s independent forecaster, reckons inflation will hit the Bank’s 2% target this quarter. However, this could be a short-lived dip, and prices could take off again. Potentially inflationary pressures ahead include the ongoing fight for talent, higher shipping costs due to Red Sea disruption, and the increase in the minimum wage and business rates.
Increasing consumer and company optimism could see spending ramp up, potentially putting upwards pressure on prices. So, the name of the game will still be caution in the months ahead. Although a June cut is being pencilled in, a reduction in rates in August may be more likely, when the Bank also publishes the summer monetary policy report. Of course, the reticence over reducing rates sooner, given lacklustre growth, does mean that inflation could dip below target and that the economy will take longer to get going again, but for now it’s a risk that policymakers seem willing to take.”
What this means for savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown: “Falling inflation is great news for savers, when you look at the return they’re getting on cash after inflation. Usually this comes with a sting in the tail, because it means interest rates could also be on their way down. However, we’re at an unusual moment in the savings market. Following the steep falls at the start of the year, savings rates have stabilised recently, and over the past four weeks have actually risen. It makes this a great time to capitalise on the deals that are around at the moment.
The rates on one-year fixed term deposits have risen the most over the past four weeks, and these products are still offering the highest rates across the savings curve. Not only that, but they lock in the deals available before the market starts to reprice to take account of falling Bank of England rates. If you don’t need a chunk of your savings for a year or longer, it’s well worth considering a fixed rate deal right now.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The interest rate hiking cycle brought misery for many, but if you were on the hunt for an annuity, it was a golden time as incomes soared skywards. After such a prolonged period of increases, there were concerns when the Bank finally pressed the pause button that we would see incomes start to fall back. The good news is that even though they did slightly soften, they’ve been quietly on the increase again in recent months.
According to HL’s annuity search engine, a 65-year-old with a £100,000 pension can currently get up to £7,430 per year from an annuity. This is just a whisker away from the £7,586 they could have got in the aftermath of the mini-Budget.
With no interest rate cut seemingly on the horizon for a few months yet, we should see annuity rates remain fairly stable for a while. Even when the Bank does start to cut, it’s well worth saying that we won’t expect them to fall as quickly as they rose, so we can expect interest to continue to grow in this once much maligned market.
Annuities are the ultimate long-term product – once bought they can’t be unwound, so you need to consider your decision carefully. You could be retired for decades so you need to think about inflation and the impact it could have on your purchasing power long term. Inflation-linked annuities are available, but they have a much lower starting income. Of course, your income would increase every year, but it can still take many years to make up the difference.
It’s a finely balanced decision that should be a major factor in your thinking. You may opt to go down the inflation linked path or adopt other means of protecting your portfolio such as annuitising in stages throughout your retirement. This allows you to leave more of your pension invested so it has more time to grow. You could also benefit from higher annuity rates by annuitising at older ages and if you develop a condition that qualifies you for an enhanced annuity you could get a further boost.”
What this means for mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown: “The mortgage market is increasingly convinced that Bank of England rates aren’t going anywhere in a hurry. Mortgage rates climbed throughout February, as banks priced in the risk of Bank of England rates staying higher for longer, and they’ve continued to rise throughout March.
However, we will have to see how the market reacts after the expected fall in inflation this week. The Bank of England has warned it’s a blip, so inflation will bounce back a bit, and as a result it won’t react in a hurry. However, it’s not beyond the realms of possibility the mortgage market gets excited about potential rate cuts again. It wouldn’t be the first time it over-reacted to inflation data.
For anyone facing a remortgage, we can expect rate cuts this year, but whether you move to a variable deal in the interim or fix now will depend on whether you’re prepared to trade certainty for the chance of a lower rate. The HL Savings & Resilience Barometer shows how devastating a remortgage can be while rates are higher, and why cutting monthly costs will be the priority for so many. By the end of this year, one in four mortgage holders are expected to be at risk of falling into arrears – because they spend so much of their monthly income on keeping a roof over their head.”
