The economy appears to be thriving, but is it at the cost of interest rates?
Official figures have revealed that inflation has dropped to its lowest level in almost two and a half years, although economists warn interest rates are unlikely to follow suit.
This morning, data from the Office of National Statistics (ONS) showed that inflation rates dropped to 3.4% in February as a result of a slowdown in the pace of food and restaurant prices. The majority of economists had predicted that February’s figure would fall to 3.5% – the lowest since September 2021, when it was at 3.1%.
Against this backdrop, investors are suggesting that inflation will continue to fall throughout the next few months. However, despite this positive news, policymakers at the Bank of England are expected to leave interest rates unchanged when they meet tomorrow – Thursday 20th March.
The central Bank maintains an inflation target of 2% and is forecasting that CPI will fall below 2% in April and remain there for the majority of the summer.
Although high interest rates appear to be helping reduce inflation figures, they are causing people in the UK to suffer. According to data from the ONS that was published in 2023, around 35% of adults reported it was difficult to afford their rent or mortgage payments and an estimated one in 20 adults reported that they couldn’t afford food.
In addition, Daniel Austin, CEO and co-founder at ASK Partners, has claimed that keeping interest rates as high as they are, will have detrimental effects on people/businesses who are currently paying back bank loans.
‘These inflation figures indicate that the Bank of England is likely to hold interest rates for longer, especially with the green shoots we have seen in economic recovery, which should sustain inflation at this level,’ Austin said. ‘This is a positive sign for coming out of a mild recession but does mean that pressure will remain on those serving debt.’
Austin added: ‘As property loan extensions come to an end, borrowers will be forced to inject new capital, return assets to lenders or sell in a soft market. Those assets that end up on the market will help activate the cycle and provide opportunities for buyers with capital, who will see this as the best time to acquire assets at substantial markdowns.’
Reports of inflation rates reducing has also caused controversy to break out amongst political parties just months before a general election is due to be held.
Chancellor Jeremy Hunt has said that the falling figures are a sign that the Conservatives economic plans are working.
Mr Hunt said: ‘This sets the scene for better economic conditions, which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work – but only if we can do so without increasing borrowing or cutting funding for public services.’
Nevertheless, his Labour counterpart, Rachael Reeves, has claimed that this country cannot afford another four years of a Conservative government. She dismissed Mr Hunt’s claim and said prices remained high while ‘the tax burden is the highest it has been in 70 years and mortgage payments are going up.’
Image: Joshua Rawson-Harris
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