‘Good news’ as inflation and interest rates to drop below 3%

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Inflation has been one of the main contributing factors to the rise in the cost of living in the past year. However, CPI inflation is to fall significantly throughout the year which will be “good for savers”, according to experts.

During his Budget speech last week, Chancellor Jeremy Hunt said inflation is expected to fall dramatically in the coming months.

Specifically, he cited figures from the Office for Budget Responsibility (OBR) which found that the rate of inflation would drop below three percent by December.

Speaking in the House of Commons, Mr Hunt said: “Despite continuing global instability, the OBR reports that inflation in the UK will fall from 10.7 percent in the last quarter of last year to 2.9 percent by the end of 2023. That is more than halving inflation.”

This follows Prime Minister Rishi Sunak’s pledge to the country to slash inflation by half this year.

In reaction to this news, Unbiased CEO Karen Barrett highlighted the knock-on effect this will have on interest rates if inflation continues to drop by this forecast rate.

She explained: “The news that inflation is forecast to fall below three percent later this year is good news for borrowers and savers.

“High inflation has been around for well over a year now. It’s causing our savings to erode in value, and making our mortgages expensive.

“If inflation drops to a more manageable level then the Bank of England will halt interest rate rises, and may even start to lower the base rate, helping to push down our future mortgage repayments.”

As it stands, the rate of Consumer Price Index inflation for January 2023 is sitting at 10.1 percent.

Despite still being extremely high, CPI inflation has dropped slowly for three consecutive months which suggests improvements in the UK’s economy.

In response to inflation, the Bank of England has opted to raise the country’s base rate ten times in a row in the past 12 months.

Currently at four percent, the base rate hike has been partially passed onto the savings interest rates from high street banks and building societies.

However, the increase in interest rates has failed to directly compete with inflation due to the CPI rate being so high.

The forecast that inflation will drop below three percent by the end of the year means that the base rate will likely drop from its current four percent rate.

Later this week, the central bank’s Monetary Policy Committee (MPC) will meet once again to discuss another potential hike to the base rate.

With the recent series of events within the banking sector, experts are unsure whether interest rates will rise in the short term before dropping significantly later in 2023.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “A week ago a rate rise seemed nailed on, but the woes of a handful of banks have loosened convictions considerably.

“The Bank could go either way on whether to raise or pause again. However, even if it chooses to wait for the dust to settle, this may not be the last of the rate rises.

“The threat from inflation hasn’t receded, and while it is now expected to drop back to 2.9 pecent by the end of the year, the Bank will still be concerned about pressing pause at a time when inflation remains sky high.”

February’s CPI inflation figures will be confirmed by the Office for National Statistics (ONS) on March 22, 2023. The Bank of England’s MPC will announce the state of the base rate on March 23, 2023.

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