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Experts predict inflation to fall below 2% and base rate to drop

Experts predict inflation to fall below 2% and base rate to drop
Emma Lunn
Written By:
Emma Lunn

A new inflation forecast means the Bank of England may reduce the base rate sooner than expected.

Financial experts have suggested the inflation rate will drop to 2% by April.  It currently stands at 3.9%, and was in double digits as recently as March 2023.

Inflation to fall

Several economists have predicted that inflation will continue to fall in 2024 – possibly to even less than the Bank of England’s 2% target.

Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, said he expected CPI inflation to average 2.1% in 2024.

James Smith, developed markets economist at ING, said: “Headline inflation is set to fall to 1.6% in May on our current forecasts and stay below target until November. Some of that is linked to an expected 15% fall in household energy bills in April, more than offsetting the 5% increase last week.”

Investec said inflation was likely to fall to around 1.5% in the July-to-September period in 2024.

Philip Shaw, Investec chief economist, said in a note to clients: “It is feasible that the economy remains subdued for longer and that this weakens both the labour market and the inflation profile by more than we are forecasting.”

Meanwhile, Deutsche Bank predicted that CPI inflation rate will average 2.5% in 2024, pushing below 2% in April and May. 

Sanjay Raja, senior economist at Deutsche Bank, said: “Since our winter forecast update, the inflation outlook has changed meaningfully. The latest inflation read for November highlighted even more of a slowdown in price  pressures than we anticipated. 

“And it’s not just food and energy prices pushing down on inflation. Core goods, and some demand-sensitive services items, have pulled inflation lower – falling meaningfully below the Bank of England’s latest projections. Equally, the energy outlook has shifted dramatically. In spring, a hefty cut to energy bills is now expected to bring about a quicker descent to target than we previously assumed.”

Base rate cut

With inflation’s decent, the base rate could follow suit. However, ING is sticking with its current call of an August cut, with 100 basis points of easing through the remainder of this year.

Smith said: “Investors are now pricing five rate cuts from the Bank of England this year, and that’s only slightly less than what’s priced for the ECB or Federal Reserve.” 

Investec said on Wednesday it now expected three 25 basis-point interest rate cuts by the Bank of England in 2024 rather than its previous call of two.

Shaw said: “In the absence of a major negative shock to the economy, our core view remains that the five cuts in interest rates which are currently priced into UK markets for 2024 are a touch excessive.”

Mortgage rates could fall

Falls in inflation and the base rate will be good news for borrowers struggling with high mortgage rates.

Smith predicted that the average mortgage rate on outstanding lending hasn’t got much further to climb.

He said: “We expect it to reach 3.6% at the end of this year, only a slight increase on where it is currently. Remember that only a quarter (28%) of households actually have a mortgage, and if only a fifth of them are refinancing this year, the impact on the wider economy shouldn’t be overstated.”

Bank of England Governor Andrew Bailey said on Wednesday he hoped that the recent fall in the cost of mortgages would continue.

“Obviously we have had a big change in market interest rates in the last few months and so the cost of mortgages is coming down,” Bailey told lawmakers in parliament at a Treasury Committee hearing.

Danni Hewson, head of financial analysis at AJ Bell, added: “Anyone waiting with bated breath for Andrew Bailey to give us a clue about when interest rates might be cut will be disappointed, but the governor of the Bank of England did seem upbeat about the prospects of mortgage holders.

“Mr Bailey told MPs that whilst some households were clearly facing very difficult times, we weren’t seeing the same kind of stress amongst homeowners that we witnessed during the global financial crisis.

“Repossessions haven’t spiked and falling rates from lenders coupled with a resilient jobs market mean it’s an improving picture for this segment of the population.

“Whilst anyone looking to re-fix over the next twelve months will still face significantly higher monthly payments, they won’t face quite the same shock they’d perhaps been prepared for.”