Falling inflation sparks interest rate warnings
INFLATION has fallen to its lowest rate in 18 months, leading experts to predict that there will be no rise in interest rates before the end of the summer.
According to new data from the Office for National Statistics, inflation fell to 2.4 per cent in April, down from 2.5 per cent the previous month. This brings it closer to the Bank of England’s target of two per cent, and effectively reduces the likelihood that the bank’s Monetary Policy Committee (MPC) will raise interest rates at its meeting next month.
Last week, the MPC voted to hold the base rate at 0.5 per cent, despite speculation that it would rise to 0.75 per cent. These low rates have translated into low interest rates for savers who keep their money in cash ISA accounts or bank-run savings accounts, which frequently fail to beat the rate of inflation.
Read more: Cash ISA savers left £4bn short by inflation
“At first sight, today’s drop in inflation may come as welcome news to consumers, but let’s not forget that it still remains higher than cash savings rates,” said Simon Longfellow, head of stepstoinvesting.com.
“This coupled with last week’s interest rate decision means consumers will continue to see their money being eroded. Last year alone, UK savers saw the purchasing power of their money fall by £30.3bn, as inflation far outstripped the interest earned on their cash. This is because people are opting to leave their money in cash savings not appreciating that, in fact, their money may be losing value every day.”
Yesterday, Bank of England governor Mark Carney told the Treasury that “real household incomes are about £900 per household lower than we forecast in May of 2016, which is a lot of money.” Carney went on to blame Brexit for the UK’s low wage growth and higher inflation.
“With inflation still high and take-home pay in the first stages of recovery, the situation is finely balanced,” said Nancy Curtin, chief investment officer at Close Brothers Asset Management. “Mark Carney was criticised for sending mixed messages after hinting than an interest rate rise was no longer imminent, but the economic data backs up his shift in tone. With the UK economy continuing to lag behind its global competitors, solving the productivity puzzle remains the key to getting it out of the doldrums.”
Giles Cross, chief executive of peer-to-peer lender Folk2Folk, warned that the squeeze on UK households isn’t over, despite the falling rate of inflation, “particularly as interest rates were held yet again, meaning that consumers will continue to see next to nothing on their hard-earned money and disposable incomes will continue to be stretched far too thin.”
Cross said the big question now is when the Bank of England will next raise interest rates.
“However regardless of when, consumers would need to see rates hiked significantly to really make a noticeable difference to their money,” he added.
“Those wanting a positive return on their money will need to look at alternative avenues. The extension of ISA limits and the introduction of new products such as the Innovative Finance ISA can provide tax-free interest on investments. There are options to fit everyone’s needs.”