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The Bank of England is facing increasing pressure to lower interest rates in order to assist homeowners, following an unexpected decline in inflation which has provided consumers with “an early Christmas gift”.
The decrease in petrol prices contributed to a decrease in inflation, bringing it down to 3.9%, the lowest it has been in two years and significantly lower than Rishi Sunak’s goal of 5% by the end of the year.
Economists interviewed by The Independent stated that while the “bulge” has passed through the “snake”, many of the easily attainable measures have already been implemented. As a result, the central bank may face challenges in achieving their longstanding goal of 2 per cent.
The warning is that homeowners who were on fixed rates will now face a different reality. The slowing economy and increased mortgage expenses will result in continued struggles to maintain living standards.
Signalling a change in the political tide, work and pensions secretary Mel Stride said the inflation fall could allow the Bank to ease interest rates and aid those struggling with mortgage costs. Most economists had been expecting a dip to 4.3 per cent last month.
The cabinet minister highlighted the independence of the institution and noted that the decline in inflation, which was faster than anticipated, will relieve some pressure off the Bank to maintain higher interest rates. This will ultimately impact mortgage rates as well.
The decrease in gasoline prices contributed to a decrease in inflation, which the prime minister praised as “positive news for all citizens of this nation.”
The rate of inflation decreased for items such as food, air travel, and the price of a used car.
As Christmas approaches in a matter of days, Simon Pittaway, a senior economist at the Resolution Foundation, expressed his belief that both politicians and the general public can rejoice in this unexpected holiday gift.
However, due to the significant inflation in recent times, prices have increased by approximately 20% compared to the year 2020. Economist Laith Khalaf from AJ Bell cautioned that food prices are still experiencing a worrisome inflation rate of 9%.
On Wednesday, shoppers were on London’s Oxford Street when the inflation figures were released.
Although the most recent statistics show some improvement, Mr. Khalaf cautioned that UK consumers are still facing significant financial pressures. With many mortgage holders preparing to transition from fixed-rate deals in the upcoming year, they may be confronted with a new reality.
“It’s similar to an additional aspect of the struggle to afford basic necessities,” he stated in an interview with The Independent. “It began with the increasing costs of fuel and heating, and has now extended to food expenses. In addition, there are also rising interest rates and taxes to consider. Over the next five years, it is estimated that the tax burden will reach its highest point since the Second World War.”
According to Suren Thiru, the economics director of the Institute of Chartered Accountants, the significant decrease in inflation suggests a positive outlook. However, he also noted that despite this improvement, people’s financial situations will continue to be difficult due to increased mortgage expenses and a sluggish economy.
The Labour party cautioned that over a million individuals may experience an increase in their mortgage payments due to the impact of the Conservative party on the economy.
After the Bank of England’s choice last week to maintain its base rate at 5.25 per cent for the third time, experts predict that the markets are anticipating interest rate reductions in May, and possibly even as soon as March. This is due to increased pressure on the central bank.
According to Matthew Ryan from the financial services firm Ebury, a 25 basis point cut is expected for the Bank’s May meeting, with a possibility of cuts beginning in March. James Smith from ING bank also believes that the market is accurately predicting multiple rate cuts in 2024, starting in May.
at a Labour event
The Labour event was attended by Shadow Chancellor Rachel Reeves and party leader Sir Keir Starmer.
According to Yael Selfin, the chief economist at KPMG, the recent inflation numbers are positive, but the Bank of England may proceed with caution when it comes to lowering interest rates.
Reiterating these worries, Rob Morgan, primary analyst at Charles Stanley, referenced the significant increase in prices in recent times as he stated: “We are now seeing a decrease in [high inflation], so the surge has passed through the system.”
“We are concerned that the decline in energy and fuel prices has made it seem like you have achieved easy victories. However, it will be challenging to maintain this level of disinflation in the future,” he stated.
The Bank of England may have a harder time controlling inflation in the future due to the expected rise in the national living wage and state pension, as well as the decrease in borrowing costs and mortgage rates. According to Mr Morgan, this means that the “easy” solutions for the Bank of England have already been utilized.
In response to the reported inflation data, Chancellor Jeremy Hunt stated that the economy was once again experiencing “positive and stable growth”. However, he also recognized that “numerous families are still facing difficulties due to inflated prices”, and assured that efforts will be made to prioritize initiatives that alleviate the burden of living expenses.
Rachel Reeves, the shadow chancellor, expressed that the decrease in inflation would bring some relief to families. However, she also pointed out that despite 13 years of Conservative control, working individuals are still experiencing financial struggles.
“The economy has been negatively impacted by the Conservative party, resulting in rising prices in retail stores, increasing household expenses, and a projected increase in mortgage payments for over a million individuals next year.”
Source: independent.co.uk
