It has been announced today that unfortunately, despite predictions and the Bank of England’s best efforts, the UK inflation rate still remains at above 10% (specifically 10.1%). A far cry away from the target inflation rate of 2% that the bank holds and falling slightly short of the 9.8% that many economists and other financial professionals predicted. What does this underwhelming drop in the UK inflation rate mean for the general public? Will this signal another base rate rise?
What Is Inflation?
Inflation is the rate at which prices of goods and services increase and the buying power of an economy’s currency. Essentially the UK inflation rate measures the rate of price rises in the UK. If the inflation rate is high, the price of things like food, energy, and utilities will increase. A struggling economy will normally have a high inflation rate and it is monetary governing organisations (such as the Bank of England) jobs to try and lower inflation rates. They do this by increasing the base rate of which they start charging interest on borrowing, making other interest rates rise and discouraging spending. Hypothetically this should bring down inflation.
What Has Happened To UK Inflation Over the Last Year?
Over the last year, UK inflation has sharply increased due to a lot of different factors such as the fallout of the COVID-19 pandemic and the war in Ukraine. In the last 12 months up to March 2023, the inflation rate in the UK rose by a staggering 8.9%. The Bank of England had set a target inflation rate of 2% so to try and bring down inflation, they increased their own base rate starting in September 2022 and raising it several times over the last 6 months so that it currently sits at 4.25% (as of April 2023). This has meant that the price of fuel, food, gas, electricity, water and many other things in the UK have increased significantly.
Has UK Inflation Decreased?
The good news in all this is that yes, UK inflation has decreased! But not by as much as everyone hoped it would. Because the Bank of England imposed such a sharp hike on the base rate and prices rose so dramatically, many of us hoped that this would valiantly fight back the metaphorical inflation beast but it seems to have only nudged the monster back a smidge.
Many economists in the UK were predicting that by the time the inflation rate was measured again, things would stand at about 9.8%. Still a higher rate than the target, but much better than the over 11% that it was at the end of 2022. But, we were all given a bit of a shock this morning when it was announced that inflation still stood at double figures (10.1%). A drop, but not a huge one.
Will The Base Rate Rise Again?
The Bank of England’s monetary policy committee (the committee who decide the base rate) will meet again on the 11th of May to decide whether they will need to increase the base rate again. In our opinion, we believe that this unfortunate data about UK inflation will mean that the base rate will rise once again by perhaps 0.25% or 0.50% bringing the base rate to between 4.50% and 4.75%. Is this for definite? No. Perhaps the bank will see things differently to the outside world and perhaps they have some more positive projections for inflation than we do, but it is looking highly likely.
What Would Another Base Rate Rise Mean?
Of course we would all hope that it would mean that inflation would start coming down at a faster rate. But as we have already seen, this is not a certainty. We will more than likely see more of a rise in the price of food and drink, which has already risen to an inflation rate of 19.1%, the highest rise in 45 years. It is important to remember that inflation dropping does not mean that the price of food is dropping, just that the rate of which the price of food increases is slowing down. That means that while inflation is still high, the price of food will continue to rise quickly. Should a base rate increase happen, food prices will almost certainly go up.
Mortgage interest rates and other interest rates on other borrowing could also go up, but as we have seen from other recent base rate rises, this is not always the case. In our opinion, mortgage lenders already over compensated for predicted future rises, so in most cases they have not had to increase their rates again and again. And in most cases, they have actually reduced their rates. But, could this latest blow to the economy mean lenders will be forced to bring rates back up? We will have to wait and see.
Who Can I Speak To About Inflation and Mortgage Rates?
As mortgage advisors, it is our job at Oportfolio to be absolutely up to date with all the latest economic news and mortgage related data in the UK. We produce daily mortgage news articles and blogs for our clients to receive updates and new information. You can also call and speak to one of our mortgage professionals if you are concerned about inflation and interest rate rises. We are here to help, and our team are more than happy to speak with you and answer any questions you might have. Call our team today for a free initial mortgage consultation.