Critical week ahead for interest rates and inflation

Latest inflation figures are announced on Wednesday and the Bank of England makes its next base rate decision on Thursday.

The Office for Budget Responsibility says inflation is likely to fall to 2% in the second quarter of this year - so a significant move in that survey is expected next week.

But the Bank of England says that after this, inflation is likely to rise again for the rest of the year.

Most market analysts expect the Bank to cut rates in June and to end the year at 4.2%.

Susannah Streeter, head of money and markets at business consultancy Hargreaves Lansdown, says:“We’re on a downwards escalator, with another drop in inflation expected, and an accelerated move lower forecast for the months to come. 

“But Bank of England policymakers are still set to hold their position, and grip on to higher interest rates.  They will want more evidence that wage growth will ramp down further before they budge and bring in a rate cut.

“The Office of Budget Responsibility, the government’s independent forecaster, reckons inflation will hit the Bank’s 2% target this quarter. However, this could be a short-lived dip, and prices could take off again. 

“Potentially inflationary pressures ahead include the ongoing fight for talent, higher shipping costs due to Red Sea disruption, and the increase in the minimum wage and business rates.

“Increasing consumer and company optimism could see spending ramp up, potentially putting upwards pressure on prices. So, the name of the game will still be caution in the months ahead.”

Analysts says that although a June cut is being pencilled in, a reduction in rates in August may be more likely when the Bank also publishes the summer monetary policy report. 

The reticence over reducing rates sooner, given lacklustre growth, means that inflation could dip below the government’s 2% target in the near future.

What might this mean for mortgages, a key factor in the health of lettings and sales markets?

Rates climbed throughout February, as banks priced in the risk of Bank of England rates staying higher for longer, and they’ve continued to rise throughout March.

As the Bank of England has warned that the next inflation figure may be a blip - and temporarily low - lenders may not react in a hurry.

Hargreaves Lansdown warns that by the end of this year, one in four mortgage holders are expected to be at risk of falling into arrears – because they spend so much of their monthly income on keeping a roof over their head.

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