Falling inflation means positive forecast for interest rates this year

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Falling inflation means positive forecast for interest rates this year Posted On 25 March 2024

Bank of England’s decision to keep the base rate at 5.25% is another step closer to glory, as inflation falls

Although the recent decision taken by the Bank of England to keep the base rate at 5.25% may seem sombre at first, markets predict that the next cut will occur in June, while other analysts believe that it may happen as early as May. Following the decision (8-1 in favour of keeping interest rates at 5.25%), the pound saw a modest decline.

From 4% in January to 3.4% in February, inflation has been gradually approaching the Bank's 2% objective. The inflation rate dropped more than expected. Experts had anticipated a decrease to 3.6%. The cost of living is increasing at its slowest rate since September 2021, when it was 3.1%, as a result of the decline to 3.4%. Consequently, price increases abated more than expected in February, heightening hopes that the Bank of England may begin reducing interest rates in the coming months, which, in turn, will mean lower mortgage rates.

Global inflation has decreased in part because higher interest rates make borrowing more expensive, which cools the economy and reduces expenditure. Central banks may drop interest rates to encourage borrowing and economic activity in the event of low inflation and a sluggish economy. This could result in cheaper mortgage rates.

Although the Bank of England's 2% objective for inflation is still being exceeded, the trend seems to be apparent. In the aftermath of Russia's invasion of Ukraine, which caused dramatic rises in energy costs, inflation peaked at over 11% by the end of 2022.

The administration is hoping that a decline in interest rates and inflation would create a positive vibe in advance of the January 2025 general election.

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