Published: 18/01/2024 By House & Son team
Anticipation of a reduction in interest rates persists despite a surprising upswing in the UK's inflation rate last month. In December, inflation, the metric tracking the gradual increase in prices over time, saw a slight uptick to 4%, up from 3.9% in November. Contrary to economists' forecasts of a modest decline, the unexpected rise was attributed to increases in tobacco and alcohol prices.
However, optimism prevails with the expectation of forthcoming rate cuts later this year, particularly with projections of energy bills decreasing in 2024. The recent financial strain on households, triggered by spikes in gas, electricity, and food costs, initially propelled by the conclusion of global COVID lockdowns and exacerbated by Russia's invasion of Ukraine, has heightened the need for economic measures.
The Bank of England responded by raising rates to address the escalating pace of price rises in the UK, reaching a 15-year high at 5.25%. This increase has, in turn, elevated mortgage rates due to the heightened cost of borrowing. On a positive note, returns on savings have also seen an increase.
Despite the Bank's current stance, financial markets and traders are hopeful for a change in 2024. The inflation rate has significantly dropped since its peak at 11.1% in October 2022, the highest in four decades. While inflation remains nearly double the Bank's 2% target, recent market shifts suggest a more optimistic outlook on rate cuts.
David Rogers Cert CII (MP), Mortgage Consultant for Oakwood IMC, acknowledges that the previously expected five cuts, priced in by investors before the latest inflation figures, seem ambitious. However, he remains optimistic, suggesting that a further decline in energy prices could instil confidence in the Bank to initiate its first rate cut in May, or in June.
Ben Brown, Head of Financial Services for Oakwood IMC, shares a positive perspective, expecting inflation to dip below the Bank's 2% target in April. This potential development could position policymakers to consider interest rate cuts by June, fostering a more optimistic economic outlook.