Economists are issuing warnings that inflation could potentially escalate to 3 percent in the coming months, thereby dashing hopes of interest rate cuts by the Bank of England and delivering a blow to home buyers. The Monetary Policy Committee (MPC) of the Bank of England oversees interest rates, aiming to maintain an inflation rate target of 2 percent.
However, price hikes in areas such as energy, food, and petrol are driving up costs of living, leading to predictions that inflation will reach 3 percent by spring. Just a few months prior, experts from the City were forecasting that the Bank would reduce the base rate four times throughout 2025, lowering it from 4.75 percent to 3.75 percent or even less.
Now, they are only anticipating one or two reductions, implying that the cost of home loans will remain higher than many had hoped. This is unfortunate news for first-time buyers and approximately 700,000 individuals who will need to remortgage this year as their cheap fixed-rate deals expire.
Economists are issuing warnings that inflation could potentially escalate to 3 percent in the coming months
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New analysis from Bloomberg Economics suggests that household energy costs will contribute an additional 0.5 percentage points to headline inflation in April. The recent depreciation of the pound against the dollar implies that the cost of importing oil will increase, resulting in a rise in petrol prices.
Furthermore, the nation’s major supermarkets assert that wage increases and National Insurance hikes – announced in the October Budget – will be passed on to consumers through elevated prices. They predict that food price inflation will increase from 1.8 percent. By the end of this year, it is predicted to reach 4.2 percent.
Andrew Goodwin, chief UK economist at Oxford Economics, told Bloomberg: “We already thought inflation would be higher than the BoE forecasts this year, but the recent rise in energy prices means it’s likely to be higher still.”
The BoE Governor Andrew Bailey and the rest of the MPC now face a difficult decision over whether to continue to keep interest rates high to bear down on inflation which carries a risk of tipping the economy into recession. Dan Hanson, chief UK economist at Bloomberg Economics, said: “The broader question for the BoE is what they focus on in the coming year if inflation is above target and unemployment is rising.
“The recent inflation episode taught us that inflation expectations can drift,” he said. “That means the Bank is unlikely to support the economy as much as it might have done had it been confronted with the same trade-off prior to the pandemic. The upshot is that it’ll be hard for it to shift away from gradual cuts.”
Deutsche Bank chief UK economist Sanjay Raja also expects higher prices at the petrol pump and for gas and electricity to boost inflation above 3 percent. “Our biggest worry from a BoE perspective, is that rising inflation to start the year pushes inflation expectations higher too,” he said. “We’re already seeing higher energy and food prices seep into the consumers’ minds and this, we think, could cause some consternation around the policy path.”
Gross Domestic Product (GDP) figures to be published on Thursday are expected to confirm a slowdown in growth since Labour entered power last July.