Doubts over inflation and interest rates create uncertainty for savers and borrowers | Personal Finance | Finance

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New fears that inflation will begin to rise after dipping to two percent in the coming months have emerged.

Finance industry experts have pointed to evidence from the Office of Budget Responsibility (OBR) that falls in inflation could be short-lived.

If this is the case, the hoped-for cuts in interest rates may be delayed, which would have knock-on effects for savings, annuities and mortgages.

Investment firm Hargreaves Lansdown said: “The Government’s independent forecaster, reckons inflation will hit the Bank’s two percent 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.”

The current Bank of England base rate is set at 5.25 percent and City analysts believe it could start to come down in June, if not earlier. However, Hargreaves Lansdown say reductions are not guaranteed given concerns about inflation.

Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “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.

“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.

“Although a June cut is being pencilled in, a reduction in rates in August may be more likely.”

What this means for savings

Mark Hicks, the firm’s head of Active Savings, said: “We’re at an unusual moment in the savings market.

“Following the steep falls at the start of the year, savings rates have stabilised recently, and over the past four weeks have actually risen. It makes this a great time to capitalise on the deals that are around at the moment.

“The rates on one-year fixed term deposits have risen the most over the past four weeks, and these products are still offering the highest rates across the savings curve. Not only that, but they lock in the deals available before the market starts to reprice to take account of falling Bank of England rates.”

What this means for annuities

Helen Morrissey, head of retirement analysis, said: “The interest rate hiking cycle brought misery for many, but if you were on the hunt for an annuity, it was a golden time as incomes soared skywards.

“According to HL’s annuity search engine, a 65-year-old with a £100,000 pension can currently get up to £7,430 per year from an annuity.

“With no interest rate cut seemingly on the horizon for a few months yet, we should see annuity rates remain fairly stable for a while.”

What this means for mortgages

Sarah Coles, head of personal finance, said: “The mortgage market is increasingly convinced that Bank of England rates aren’t going anywhere in a hurry.

“For anyone facing a remortgage, we can expect rate cuts this year, but whether you move to a variable deal in the interim or fix now will depend on whether you’re prepared to trade certainty for the chance of a lower rate.”



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