- The Office for Budget Responsibility and Bank of England expect inflation to fall to 2% in the second quarter, so we’re likely to see another move in this direction.
- The OBR thinks inflation will remain around 2% for the rest of the year, while the Bank expects it to pick up.
- The market expects the Bank of England to cut rates in June.
- Savers have something to celebrate.
- Pensioners have a tricky decision to make over annuities.
- Financial resilience is under pressure for borrowers.
Inflation figures for March will be released on 17 April.
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Like a helium balloon trapped in the rafters of a village hall, inflation is gradually becoming less evident as time goes on. Next week’s inflation rate is likely to fall again, on a relatively rapid path to 2%. Yet the party isn’t quite over for the interest rate hawks.
All the official forecasts put inflation at 2% within the next couple of months, and there’s every sign that March’s figure will move some distance in that direction. In many cases, this will be sky-high inflation from a year earlier dropping out of the figures. It means we’re unlikely to see an enormous number of price cuts, although there will be some items in the food basket which should be cheaper than a year earlier, and more good news for big consumers of dairy products.
The official forecasters disagree exactly where inflation will head after hitting 2% – because the Bank of England thinks it’ll head marginally north from there, while the Office for Budget Responsibility expects it to stay put around 2% for the remainder of the year.
However, there are still some inflationary forces at work, including geo-political tensions, which have been pushing the oil price up and adding to supply chain costs. At the same time, rising consumer and company optimism could see spending ramp up, potentially putting upwards pressure on prices. Inflation has been surprising on the upside globally in recent months, so if inflation comes in ahead of forecasts, that wouldn’t be a bolt from the blue. With this in mind, it’s no surprise that the market expects the Bank of England to sit on its hands at the next MPC meeting, and not to cut rates until June at the earliest.”
What this means for savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown:
Falling inflation is something for savers to celebrate, because it ramps up the return they’re getting on cash after inflation. Usually, at times like this, they’d suffer the unpleasant hangover of a swathe of cuts to savings rates, as the market moves swiftly to get in ahead of expected Bank of England rate cuts. However, this time, because the market got ahead of itself earlier this year, and because the Bank of England is expected to hang fire for a while, there are still multiple fixed rates across the savings market that offer returns in excess of 5%.
Some of the best rates can be found in shorter-dated fixed-term deposits for less than one year. Fixed rates over three to six months have risen the most over the past few weeks, and these products are offering the highest rates across the savings curve. They currently offer higher rates than your typical one-year fixed terms, as the market starts to reprice to take account of expectations of Bank of England rate cuts later this year. You’re less likely to find these at your high street bank, so it’s worth checking online banks and savings platforms, which have a range of deals available. If you don’t need a chunk of your savings in the next six months, it’s a great time to capitalise on the deals that are around at the moment.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“Inflation is set to fall back once again, bringing some relief to our over stretched budgets. This month’s 8.5% boost to the state pension will support the purchasing power of pensioners, who have seen their finances squeezed during the cost-of-living crisis. The sky-high inflation of recent years may be on the wane, but it will take a long time to forget the impact it had on our finances.
Pensioners in the market for an annuity should consider the long-term impact of inflation on their income. When you first buy it, the starting income from an inflation-linked annuity is much lower than from a level one, so it’s understandable why most people opt for a level product. A 65-year-old with £100,000 pension can currently get £6,983 from a level annuity. This compares to £4,406 for one that increases in line with RPI.
However, RPI has averaged around 4% a year over the past 40 years, and if it continued at this level, it would take around 12 years for the income from an RPI-linked annuity to match that of a level annuity. On average, at 65 a man is expected to live another 18.5 years and a woman 21 years, but averages can only tell us so much. You need to bear factors such as your health and longevity in mind when making your decision.
It’s a tricky decision to make – do you go for the higher amount now and risk its purchasing power being eaten away by a period of high inflation, or do you take the lower income now with the promise of increasing income but the risk you may not live long enough to get your money back?”
What this means for financial resilience
Sarah Coles:
“Households with mortgages or credit card debt will be holding their breath for a rate cut. Unfortunately, that might not be an ideal long-term strategy, because they could have a bit of a wait on their hands.
Those with an impending remortgage face a hike in their monthly costs, and while they might have been hoping rates would have fallen by now, they’ll be disappointed. According to Moneyfacts, at the end of February, the average 2-year fixed rate mortgage charged 5.75% and it’s currently around 5.8%. It’s not a stratospheric rise, but it’s moving in the wrong direction.
The fall in inflation could be the news the mortgage market needs in order to start bringing rates down again, but much will depend on how far inflation moves – and whether core inflation budges too.
The rising cost of debt has taken a toll on household resilience. The HL Savings & Resilience Barometer shows that thanks to rising rates, one in four mortgage holders are expected to be at risk of default by the end of the year. Meanwhile, rising debts at a time of higher rates is causing real pain too – especially among lower earners.
More than a quarter (27%) of the lowest earners are in arrears, while 37% have debt worries. It’s easy to see why, because their debt repayments (excluding mortgages) are painfully high compared to their incomes. The lowest fifth of earners have average debt repayments of £168 a month, compared to £141 among the second lowest fifth, and £315 among middle earners.”
