(qlmbusinessnews.com Wed. 17th Oct, 2024) London, UK —
UK Inflation at 3.5-Year Low: Are Interest Rate Cuts on the Horizon?
Inflation in the UK has unexpectedly dropped to 1.7% in the year to September, marking the lowest rate in over three and a half years. The figure, now below the Bank of England’s 2% target, raises expectations of further interest rate reductions in the coming months.
The Office for National Statistics attributed the decline to a reduction in airfares and lower fuel prices. These decreases were the primary drivers of the inflation slowdown, surprising analysts who had anticipated a more modest fall. The inflation data is also crucial in determining annual benefit increases, with many expecting a rise in benefits next April based on this figure.
At present, UK interest rates stand at 5%. The Bank of England made its first rate cut in August but held off further reductions in its most recent meeting. However, with inflation slowing at a faster pace than expected, the groundwork for additional cuts is being laid.
Interest Rate Cuts Anticipated in November and December
Danni Hewson, head of financial analysis at AJ Bell, stated that a 0.25 percentage point cut in interest rates is “almost certain” for November, while the probability of a second cut in December has also increased.
Investment firm Hargreaves Lansdown's Susannah Streeter suggested that the lower inflation rate opens up possibilities for not only a November reduction but potentially another in December, signalling further relief for borrowers.
However, KPMG UK's chief economist Yael Selfin has cautioned that while the Bank of England is likely to reduce rates in November, rising household energy bills, expected to increase by 10%, may push inflation back up later in the year.
The Bank’s base interest rate influences the rates set by high street banks for loans and credit cards. Although the higher rates have made borrowing more expensive for mortgages and credit, they have provided savers with better returns. Increased mortgage repayments for landlords, however, have resulted in higher rents, contributing to the ongoing cost-of-living crisis.
Inflation’s Impact on Benefits and Pensions
The unexpected inflation figure comes as discussions intensify ahead of the upcoming Budget on 30 October, when Chancellor Rachel Reeves is expected to announce tax rises and spending cuts to address a £40bn shortfall.
September’s inflation rate typically sets the benchmark for benefit increases in April. Universal Credit and disability benefits are expected to rise in line with inflation, although the government is seeking to curb spending on disability and incapacity benefits.
Additionally, state pensions are forecast to increase by 4.1% next April, thanks to the triple lock, which guarantees pension increases by the highest of wage growth, inflation, or 2.5%.
While inflation has slowed, meaning prices are rising at a slower rate, this does not translate into lower prices for goods and services. For families already feeling the strain of high living costs, the relief offered by lower inflation may be limited, particularly as food prices, including staples like milk, cheese, and eggs, have continued to climb.
Looking Ahead
As the UK heads into winter, the government faces a balancing act between stimulating economic growth and managing the nation's financial constraints. The fall in inflation has provided some breathing space for households and businesses, but with energy prices and food costs still rising, any economic recovery may be fragile.
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