Falling gas and electricity prices have driven UK inflation to its lowest level in almost three years; prices rose at 2.3% in the year to April, down from 3.2% the month before, official figures show.

 
However, it remains higher than the Bank of England’s target of 2% and was slightly higher than experts expected.

But the Bank has hinted that interest rates, which have been raised in recent years to slow price rises, could be cut this summer. Rates are currently at 5.25% – the highest level in 16 years.

 

Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, said: “The news that inflation has dropped to within touching distance of the Government’s 2% target will come as a great relief to many. However, now is not the time for premature celebration.

“People mustn’t be swayed into thinking the economy is ‘back to normal’; caution should be exercised. Prices and core inflation are still at high levels. The long-lasting effect of a high-inflation environment cannot be reversed in one fell swoop, and those who are still battling with expensive household bills and repayments must continue to be proactive with their finances.

“With the 2% target within reach, the Bank of England will no doubt be considering interest rate cuts in the coming months. So, people should take advantage of the current positive savings outlook, explore their options and maximise their returns before they lose their opportunity.”
 
Lily Megson, Policy Director at My Pension Expert, said, “Further easing in inflation towards the Bank of England’s 2% target will be music to the ears of savers. Indeed, record levels of inflation over recent times have been disastrous for people’s savings, eroding their real value as returns struggled to keep pace with rising prices.

“Yet, beyond the positive headlines, UK pension planners may still face a challenging reality. Soaring prices and household bills have made it a nightmare to save for retirement, meaning many are not putting anywhere near enough into their pension pot.

“The government must recognise that figures like today’s do not mean the fight for financial security is over – far from it. Instead, they should work to collaborate with the financial services sector to prioritise financial education and accessible advice for all. Not only does this enable people to take control of their financial futures, but it makes sure that all benefit from an economy in recovery.”

 

“Inflation numbers are developing a nasty habit of coming in hot”

 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “While the downward trajectory of inflation in the US has stalled, in Europe and the UK the central bank fight against rising prices is bearing more fruit. The further substantial leg down in April’s UK CPI confirms this.

“However, this was less than many expected, and inflation numbers are developing a nasty habit of coming in hot. What’s more core inflation which strips out volatile food and energy prices is still stubborn at 3.9%, and services inflation is still cooling only slowly at 5.9%. April price rises in bills including water and broadband offset the cut to the energy price cap, while petrol and diesel prices also contributed over the year.

“There are some economic trends that point to a difficult last mile to sustainably keep inflation to its 2% target.

“For starters, economic growth – at 0.6% in the first quarter despite a slowdown in construction – has surprised on the upside. This is good news, but it does make the Bank of England’s decision making harder. Cutting rates would add fuel to the inflationary embers, which is intuitively the right course of action if the economy is in recession but a far more difficult call if it is expanding at a decent clip.

“Of greater concern to the BoE is wage growth, which has remained remarkably firm despite other employment trends such as unemployment weaking. As a key input into services inflation, this is a critical component of the BoE’s thinking and a nut it is yet to crack.

“With increases to minimum wage, cuts to national insurance rates, potential further tax cuts ahead of the general election, household spending power, at least for a decent proportion of the population, is now increasing. Today’s wage rises contribute to tomorrow’s spending power, adding to demand, so the strength seen is an impediment to the BoE returning inflation to the 2% target sustainably.

“Looking at commodities markets the inflationary omens are also not great. Although the oil price has remained relatively well behaved, copper and other metals, as well as many agricultural commodities, have seen sharp upturns, which could mean that the favourable trend of falling goods inflation could be set to stall.

“Taking all this into consideration, worries about a second wave of inflation are well founded. While the Bank should feel able to take its foot off the brake given the progress so far, should these signs of persistence continue the pace of rate cuts to follow may be slow and limited. It also means insufficient members of the MPC will see a clear enough trigger to act quickly on rate cuts at the June meeting. Increasingly, it looks like the balance of voting members will wish to sit on their hands until the second half of the year.

What does it mean for household finances?

“Falling inflation will be a sigh of relief for households that have battled post-Covid cost of living challenges. With wage rises now outpacing inflation there’s an opportunity to rebuild financial positions.

“For savers, there remains a period of inflation-beating returns from cash as price rises continue to recede and interest rates remain elevated to ensure they do. However, it’s a case of making hay while the sun shines. Cash returns will remain attractive for a while longer before gradually losing their gloss versus assets such as bonds and shares as the year progresses and cuts in BoE rates start to come through. As always, savers will need to shop around to secure the best deals.

“For borrowers it’s simply more of the same. In recent months lenders have been increasing rates a little, after hopes of an earlier string of base rate cuts receded. With inflation data more or less as anticipated, and consensus building around the timing of cuts, there should be a period of stability in available rates over the course of the summer. Subsequent cuts to base rates will be modest, limiting the scope for falls in mortgage rates, especially compared to the steep rise since early 2022.”
 

“Inflation dips closer to the Bank of England’s 2% target”

 
Adam Thrower, Head of Savings at Shawbrook comments: “Inflation dips closer to the Bank of England’s 2% target, putting potential interest rate cuts on the horizon. While this might sound positive, these cuts could mean lower returns for savers who haven’t secured fixed rates.The silver lining? Longer-term fixed-rate savings accounts are gaining traction. These accounts offer the chance to lock in higher, guaranteed returns for a set period, especially valuable for those saving for long-term goals like retirement. Our research shows 41% of people over 55 plan to use their savings for retirement, and these accounts could be a game-changer for those looking for potentially inflation-beating returns.”
 
Ben Thompson, Deputy CEO at Mortgage Advice Bureau, said:

“Inflation in April being just 0.3% above the Bank of England’s 2% target could be the spark to light the fire of the housing market. With inflationary pressures slowing closer to levels that the Bank of England are likely to be happy with, swap rates will fall further, and therefore those remortgaging or buying will see rates fall as a result. As we edge closer to a transformative period in the housing market, now is the time to speak with a broker and get mortgage ready.”
 

Capital.com Analyst:  Stronger data is making it harder to believe the BoE can cut rates in June, or even during the summer

 
“Market pricing has tipped in favour of ‘no rate cut’ at the upcoming Bank of England (BoE) meeting in June after UK CPI came in higher than expected this morning. It’s not that the data was bad, it just wasn’t as good as expected. As often happens, the initial reaction is driven by how the actual reading correlates to expectations, and in this case, inflation didn’t drop as much as hoped.

Consumer prices grew 2.3% in the year to April, a significant drop from the 3.2% in March, but not as low as the 2.1% anticipated. The month-on-month rate dropped from 0.6% to 0.3%. It is core inflation – which excludes volatile prices like energy and food – that has been closely monitored in recent months and could explain the hawkish reaction in markets. The monthly rise in core prices was not only higher than expected but also higher than the previous month, which can be seen as a serious concern for the Bank of England (BoE). YoY core CPI has dropped from 4.2% to 3.9%, above expectations of 3.6%.

The stronger data, specifically the stubbornness in core CPI, is making it harder for markets to believe the BoE can cut rates in June, or even during the summer. The first fully-price-in 25 bps rate cut is now in November, with a 60/40 chance of a cut in September.

These are likely to continue evolving over the coming days as markets fully digest the meaning of the data but it’s unlikely that the June meeting will result in a rate cut any more. But we will have to wait for commentary from BoE officials to see how they factor the latest inflation data into their forecasts.

For markets, the stronger CPI reading has favoured the pound and weighed on the FTSE 100 as expected. As currency pairs continue to be driven by rate differentials, the pushback in rate cut expectations has levelled the BoE with the Federal Reserve with regards to timing, which has allowed GBP/USD to break above recent short-term resistance and cover some further ground. The bullish momentum looks to be strong with the path of least resistance pointing higher, but traders should be aware of overbought conditions creeping up, with the RSI nearing the 70 mark, which has been an area of reversal for the past six months. The 1.28 mark likely remains a key focus for buyers over the coming days, but there seems to be a fair amount of resistance along the way.”
 
Ben Nichols, Interim Managing Director at RAW Capital Partners, said: “Borrowers, brokers, and lenders can afford themselves a quiet sigh of relief as inflation continues its retreat towards the Bank of England’s 2% target. With inflation seemingly under control, the likelihood of summer interest rate cuts grows more certain—a welcome development for homebuyers and mortgage-holders alike.”

“Now, it’s important to note that rates won’t decrease as quickly or significantly as they rose, but a stable inflation climate should still boost economic confidence, encouraging investment and growth in the UK property market. What’s more, with many investors having paused their buying plans in recent months, pent-up demand could spark robust market activity in the short to medium future.

“That said, it’s important to remember that rates are still much higher than we grew accustomed to in the 2010s. As such, lenders and brokers must continue to collaborate and support borrowers navigating the challenge of higher mortgage payments.“
 
Paresh Raja, CEO of Market Financial Solutions, said: “At long last, the UK’s rate of inflation has fallen to around the Bank of England’s (BoE) target of 2%, offering a significant reprieve for investors after three years of eyewatering price increases. With purchasing power now returning to a more normal level, the positive house price data that we have witnessed in the last week is likely to be compounded as more investors look to re-enter what is now a recovering market.

“However, it is important to acknowledge that while inflation is trending downwards, we are still not at a point where interest rates are going to be reduced significantly. Indeed, the BoE’s Deputy Governor has indicated that rates will be cut this summer, but the journey to a more manageable base rate will continue for some time.

“Therefore, it is crucial that lenders and brokers play a supportive role for investors as they transition to a more open monetary landscape. By providing bespoke financial products and a high level of certainty, they can ensure continued positive momentum as inflation continues to fall.”
 



Commentary » Latest » News



Leave a Reply