Pressure is mounting on the Bank of England to cut interest rates to support homeowners after an unexpected drop in inflation gave consumers an “early Christmas present”.
Lower petrol prices have kept inflation to a two-year low of 3.9%, well below Rishi Sunak’s target of 5% by the end of the year.
However, leading economists said: independent person Although “the bulge has passed through the snake”, much of the “low-hanging fruit” has been harvested and the central bank will struggle to meet its long-standing target of 2%.
They also say that many homeowners who have moved away from fixed rates are now facing a “completely different world”, while the slowing UK economy and rising mortgage costs have left living standards “in a pretty dire situation”. He warned that it would continue.
Work and Pensions Secretary signals change in political trends Mel Stride He said lower inflation could allow the central bank to ease interest rates and help people struggling with mortgage costs. Most economists had expected it to fall to 4.3% last month.
The minister emphasized independence, but said the faster-than-expected decline in inflation was “relieving some pressure”. [the Bank] In terms of keeping interest rates high, this naturally affects mortgage rates over time. ”
The fall in prices has resulted in surprisingly low inflation, which the prime minister hailed as “good news for everyone in this country”.
Inflation in food, air travel and used car prices also slowed.
With just days left until Christmas, Simon Pittaway, senior economist at the Resolution Foundation, said: “Politicians and the public alike will be delighted by this festive surprise.”
But rising inflation in recent years has meant prices are about 20% higher than in 2020, with AJ Bell economist Rais Khalaf saying food price inflation remains at a “quite alarming” 9%. I warned him to stay.
Despite the latest figures, Mr Khalaf warned that British consumers were still “extremely cornered”, with mortgage holders due to end fixed contracts next year “facing a different world”. “There is,” he warned.
“It’s like another phase of the cost of living crisis,” he said. independent person. “We started with fuel and heating, then moved on to food. Interest rates are rising and let’s not forget taxes. Over the next five years, the tax burden will rise to the highest level since World War II. It is expected that it will.”
Suren Till, head of economics at the Institute of Chartered Accountants, said the “dramatic” fall in inflation showed there was light at the end of the tunnel. But they added: “This boost will be largely offset by rising mortgage costs and the squeeze on incomes from the economic slowdown, so living standards will remain quite dire.”
Labor has warned that more than a million people face increased mortgage payments “after the Tories destroyed the economy”.
After the Bank of England’s decision last week to keep the benchmark interest rate unchanged at 5.25% for the third time, economists said markets were anticipating rate cuts by May and possibly as early as March as pressure on the central bank increased. This suggests that it incorporates .
“An initial rate cut of 25 basis points is fully priced in for the BoE meeting in May, and there is a good chance that rates will start cutting in March,” said Matthew Ryan of financial services firm Everly. , ING Bank’s James Smith said: It is right that the market is pricing in multiple rate cuts starting in May in the lead up to 2024. ”
Yael Selfin, chief economist at KPMG, said: independent person He said that while the new inflation figures were good news, “the Bank of England is likely to be quite cautious about cutting interest rates.”
Echoing these concerns, Rob Morgan, principal analyst at Charles Stanley, pointed to recent price increases: [high inflation]that is, the bulge penetrated the snake.
“What we’re concerned about is that it was a cakewalk because utility bills have come down and fuel prices have come down quite a bit. It’s difficult to recreate that kind of disinflation going forward,” he said. added.
Mr Morgan said that increases to the national living wage and state pension were imminent, and that borrowing costs and mortgage rates were also starting to fall, making it “harder to get that last bit of inflation out of the system.” “There is,” he said. It was a low-hanging fruit for the Bank of England. ”
Following the inflation figures, Prime Minister Jeremy Hunt said the economy was back on a path to “healthy and sustainable growth”. But he acknowledged that “many households are still struggling with high prices and we will continue to prioritize measures to ease cost of living pressures.”
Shadow Chancellor Rachel Reeves said lower inflation would be a “relief” for families. “But after 13 years of economic failure under the Conservative government, workers’ lives are still worsening,” she added.
“In-store prices are still rising, household spending is rising and more than a million people will face increased mortgage payments next year after the Tories crashed the economy.”