Inflation is expected to fall sharply when official figures are released next week, fuelling hopes of a summer rate cut, according to economists.
Deutsche Bank forecasts UK price rises will come in at around 2.2% in the year to April, from its current 3.2% level. Data will be released by the Office for National Statistics on Wednesday.
The fall will be driven by a cut in the energy price cap at the start of April, which is now £1,690 compared to £2,500 a year earlier.
However, within this data, the German bank expects private rents to rise by 0.7% month-on-month in April, “reflecting some of the recent strength in private rental data due to the new source methodology used by the Office for National Statistics”.
But still, many analysts say this may encourage the Bank of England’s rate-setting Monetary Policy committee to cut the base rate, at a 16-year high of 5.25%, in either June or August.
This would be the first cut in over four years, with the last coming in March 2020.
The central bank is battling to bring down inflation to its 2% target.
In MPC minutes earlier this month, it expects inflation to return “to around the 2% target” throughout the second quarter of the year, but to increase slightly in the second half of 2024 to around 2.5%, sparked by upward pressure from food, fuel and import duties as a result of Brexit.
The Bank is also concerned about persistent inflation, due to high wage growth, employment numbers, and a possible energy shock from increased unrest in the Middle East.
Hargreaves Lansdown head of money and markets Susannah Streeter says: ‘’Bank of England policymakers have stressed that it will need confidence that inflation will consistently stay at or near the target before they start reducing borrowing costs.
“They will be mindful that pay growth remains hot, with bonuses in March the highest on record. The concern is that hefty wage bills may be passed on in the form of higher prices for goods and services.
“Unemployment may have edged up, but inactivity rates have also shifted higher, with the numbers of long-term sick limiting the pools of available labour.
“This makes the Bank of England’s decision to cut rates harder, and they’ll want to see more data indicating an easing of pressures, which is why an August rate cut is still, on balance, looking more likely.’’
Hargreaves’ head of personal finance Sarah Coles points out: “Fixed mortgage rates had been moving in the wrong direction for months. Moneyfacts figures show the average two-year fixed rate rose from 5.56% at the end of January to 5.93% earlier this month.
“However, since the Bank of England emphasised that rate cuts might come sooner than some expect, they have backed off very slightly.
“The fall in inflation could keep fixed mortgage rates moving in the right direction, as banks price in an interest rate cut in June or August.
Coles adds: “However, remortgagers shouldn’t hold their breath for major cuts, because they’re not likely to shift spectacularly.
“We’re still not expecting rate cuts to come thick and fast, so those remortgaging from a rate of under 2% are still set for a horrible hike in repayments.
“For anyone on a variable rate mortgage, nothing will change until we actually get rate cuts, and the timing of those still hangs in the balance.
“If you moved to a variable rate at the start of the year in the hope that a rate cut was around the corner, it seems like you’ll have to suffer for at least a little longer on rates that are much higher than you expected.”
At the MPC’s rate decision press conference earlier this month, Bank of England governor Andrew Bailey said a base rate cut next month was possible but not a “fait accompli”.
