Inflation Decline Disappoints but Borrowers Should Remain Optimistic

Inflation Decline Disappoints but Borrowers Should Remain Optimistic

Inflation, which had lingered in double digits last year, has now dropped to the lowest level in almost three years. Disappointment has been expressed at the fact that the inflation rate failed to reach the forecast of 2.1%, which would have put it only slightly above the target rate of 2.0% set by the Bank of England. However, progress has been made as the rate is now 2.3% down from the last report of 3.2%. This brings hope to consumers the economy is moving in the right direction and their budgets will soon find relief as the inflation drop trickles down to the consumer level. The decline in the inflation rate also brings hope of lower interest rates for borrowers.

The Bank’s Monetary Policy Committee (MPC) is not due to meet this month but will meet next month on 20 June. The day prior to the MPC meeting, the next inflation report will be released. This offers not only today’s inflation report, but also next month’s report to be considered before the MPC votes on a cut to the standard base interest rate.

The current base rate of 5.25% has remained steady since it was set in August of last year. In the March meeting of the MPC, it was the first time in over two years a member did not vote for a rate increase, rather a member voted for a cut to the base rate. The next meeting of the MPC, held earlier this month resulted in a majority vote to hold the rate steady, but two members voted for a cut of 0.25%.

At the start of the year, a reduction in the base rate was expected to occur in spring, as it was hoped inflation would fall on a steep decline to target or below. However, it remained stubborn and the expectation for a rate cut was pushed to summer or early autumn. The forecast is for the August MPC meeting to result in a small cut of 0.25%, but depending on the next inflation report, the committee may choose to surprise with a reduction vote at the June meeting.

The MPC has been known to surprise experts, as the first increase to the rate during the pandemic was made in December 2021 and forecasts had been set for an increase to occur sometime in the first quarter such as the first meeting of 2022 in February or the following month. That increase at the end of 2021 took the base rate from the lowest level in the Bank’s history of almost zero at 0.1% to 0.25% and it eventually reached its current peak of 5.25% to battle inflation by 2023. A vote by the MPC to cut the standard base rate has not happened since the pandemic influenced the committee to reduce it to 0.1% in March 2020 in an emergency called meeting.

There are many experts that were less than impressed with the recent inflation report and do not see a rate cut even by August as petrol and diesel prices have kept inflation from slowing faster. The global influence on the UK economy cannot be overlooked, and in consideration of the war in Ukraine and the conflict in Gaza still disrupting the global economy as well as numerous natural disasters across the world pulling at economic stability there is much to consider by the MPC.

Cutting the rate too soon could trigger an overly optimistic spending wave and inflation could rise requiring another increase by the MPC of the base rate. This could make inflation even harder to shake from its stubborn slow decline. The committee would rather let the current rate do its job and push inflation toward target or underneath it and be sure of it being tamed before changing the rate.

For borrowers, especially hopeful home buyers and remortgaging homeowners, the optimism of lenders, despite the more likely scenario of an August rate cut last week, has triggered their offerings of lower rates. The announcement of rate cuts to mortgage and remortgage offers came from lenders through last Friday without waiting for today’s inflation report. 

Lenders are aware that spending for large item goods has reduced and foreseeing a break in demand from home buyers and homeowners in the near future, many may have chosen to make their rates attractive enough to cause those considering to wait out for the Bank to cut the base rate to instead borrow now.

Lenders might take the recent inflation report and the lack of enthusiasm as a sign to await any further cuts, or they will take the risk and the opportunity to continue to offer surprise lower rates knowing it is only a matter of time. 

For homeowners coming to the end of their mortgage term this year, or for those that have and bypassed a remortgage and allowed their lender to move them to their standard variable rate (SVR), shopping online with a remortgage broker or lender could uncover newly cut rate offers. 

Brokers work with many lenders on behalf of the borrower, so for a one-stop easy online shopping experience and perhaps exclusive deals from lenders not offered directly to borrowers, homeowners should consider visiting the website of a remortgage broker. While going website to website of remortgage lenders is a strategy to gather quotes, visiting a broker could put numerous quotes from a variety of lenders in front of the homeowner to review and compare in a matter of minutes.

Inflation may not have reached target as of yet, but in comparison to the long fight against it in 2022 and 2023, this year is more likely to be the turning point. Caution from the MPC and lenders will be evident, and from borrowers as well, as experts push off optimism for a rate cut next month or even by end of summer, but for those looking an early opportunity at lower rates, especially homeowners seeking a remortgage, shopping online could uncover today the best deals in years. 

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