The latest inflation figure for December showed that price rises have unexpectedly slowed to 2.5 per cent, down from 2.6 per cent in November. Most economists had expected a hold or a small rise.
However, inflation is still above the Bank’s 2 per cent target and experts still believe it will still rise over the year, adding mortgage rates are still forecast to increase in the immediate future.
Virgin Money upped rates by 0.2 percentage points today whilst Co-op is increasing fixed rates by 0.59 percentage points on Thursday (16 January).
Keir Starmer has made how much extra money people have in their pocket to spend a key measure of his Government.In December he set out six targets his Government should be measured by under his Plan for Change. One of these was to improve living standards – to be measured by real household disposable income.
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Read More“At present, the prospect of sub-4 per cent rates returning seems remote unless there is a significant shift in monetary policy or market conditions. Borrowers should be prepared for rates to stay above this level.”
David Hollingworth of brokers L&C said: “There’s no room for cuts below 4 per cent at the moment and I think that it’s currently more likely that we will see more rates stabilise or even continue to edge very slightly higher as the market adjusts to the volatility.
The disappointing news comes despite economists telling The i Paper that the fall in inflation will lead to the Bank of England’s Monetary Policy Committee (MPC) cutting the base rate in February.
Ruth Gregory, deputy UK chief economist at Capital Economics, added: “While a lot of the surprisingly large fall in services inflation from 5 per cent in November to 4.4 per cent in December was due to a very sharp fall in airfares, underlying price pressures still appear a bit more favourable than we had thought.
Some economists believe there could be multiple cuts this year, despite recent forecasts suggesting there would only be a couple following higher government borrowing figures.
Although a February cut that fails to lower mortgages could arguably come to late to alter the need for a mini-Budget in March if high gilts – government borrowing costs – wipe out the Chancellors £9.9bn headroom.
He predicts the Bank will cut the bank rate four to five times this year, “significantly more than market pricing.”
She said: “The pace of cuts will likely remain slow as the Bank assesses the second-round effects from the Budget. Nonetheless, we think markets are under-pricing the number of cuts we’ll see this year, with inflation expected to moderate in the second half of the year. We expect the MPC to continue easing policy over 2025, taking base rates down to 4 per cent by the end of the year.”
Monica George Michail, associate economist at NIESR, said: “The upcoming Trump presidency has heightened global uncertainty and inflation expectations. Therefore, although we expect the MPC to gradually cut rates in 2025, we think the Bank will remain cautious, and rates may remain higher for longer.”
He said: “Looking ahead, we expect inflation will stay elevated this year, partly due to autumn budget measures contributing to higher prices.
In response to better than expected inflation, and in more hopeful news for Reeves, gilt yields, which reflect UK borrowing costs have fallen in response to the inflation data, falling by around 9 basis points for two-year bonds, in a sign there is a recovery rebound, at least in the short term.
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