Inflation’s bumpy ride set to continue - Bank won’t budge on rates

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Susannah Streeter, head of money and markets, Hargreaves Lansdown:

“After a dismal December, when the price spiral unhelpfully inched back up to 4%, there are hopes that inflation will jump down in January. Unfortunately, that dream is likely to be wishful thinking. 

A rise in the energy price cap is set to be a thorn in the side of companies and consumers hoping this era of higher borrowing costs may come to an end sooner rather than later. The figures will also reflect the fact that falls in some corners of the shopping basket a year earlier will be compared to rises now.

On the plus side, stripping out these base effects, disinflationary forces are at work, which should limit any nudge upwards. People hunkered down at home in January, avoiding harsh storms, and pulled their purse strings tighter, so discounting widened across retail. Food price rises also decelerated to their slowest since May 2022, according to the British Retail Consortium.

With the economy expected to have slipped into a recession at the end of last year, demand is expected to weaken further. Inflation is expected to dip significantly lower in the months to come, towards the Bank of England’s target in the Spring, when lower wholesale gas prices will be felt. 

But even when it does hit 2%, it’s unlikely to be greeted with the ticker tape fanfare of an immediate cut in interest rates. Bank of England policymakers are largely a highly cautious bunch, and are concerned that inflation may take off again. They will want more evidence that inflation-busting pay rises are also coming down quickly before they make a move. Any potential tax sweeteners to woo voters in the budget will also be wild cards to handle, while it’s still unclear if disruption in the Red Sea will push up goods prices.

Economist Swati Dhingra is a lone voice on the MPC calling for a rate cut, concerned that the economy could be heading for a deeper downturn. The risk is that if rates stay too high for too long, growth will prove even more elusive.’’

What it means for savings

Mark Hicks, head of active savings, Hargreaves Lansdown:

“Stubborn inflation may well push the average saver into the miserable position they’ve come to recognise so well, with inflation rising faster than savings rates, eating away at the value of their nest egg. However, there’s no need to be an average saver, because there’s ample opportunity to stay ahead right now. It's essential to shop around for better rates, and consider online banks, building societies and savings platforms, where the best deals are usually found.

The average easy access rate is 3.17% (according to Moneyfacts), and we’re expecting inflation to come in well above this in January. But you don't have to settle for an average savings rate when there are still inflation-busting deals over 5% on the table.

It’s also worth highlighting that savings rates are forward-looking, and inflation is expected to fall over the coming 12 months, which means your savings could stay well ahead, and your emergency savings safety net can remain well padded in case of tougher times.

At the moment, you can get a better rate in easy access than you can by fixing for a year, but if you definitely don’t need the cash for a period, it’s well worth considering a fix, because that rate is guaranteed for the whole period of the fix, whereas variable rates tend to follow the base rate, which is likely to fall in the second half of the year.”

What it means for annuities

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:

“Last month’s shock rise showed us that that the path to 2% will not run smooth. Pensioners have had a particularly tricky time making their budgets stretch, but they do at least have the prospect of an 8.5% boost to their state pensions in April, which should go some way to alleviating the pressure on their wallets.

The tough experience of the past few years will have an enormous impact on how people plan their retirement income. Seeing inflation rise rapidly shows the importance of having headroom in your budget to tackle price spikes when they come.

We recommend people in retirement keep enough savings in an easy access account to cover one to three years’ worth of essential spending, so they have the headroom to meet rising costs if needed. It can negate the need for people in income drawdown to increase withdrawals to keep up with increases in their day-to-day costs or could act as an important top up for annuity income.

Those in the market for an annuity face important decisions. Annuities currently offer decent value with a 65-year-old with a £100,000 pension able to get up to £7,117 per year from a level annuity according to data from HL’s annuity search engine.

However, they need to be aware that the income they receive will not increase. You can of course get inflation linked products, but the starting incomes on offer are significantly lower than what you would get from a level product. An RPI linked annuity currently offers a starting income of £4,554, so you will need to consider whether you can afford to take the income hit now for the prospect of getting higher incomes in future.

Adopting a mix-and-match approach could be an option. You use an annuity to secure your key income needs and leave the rest invested, where it has the opportunity to grow. Annuitising in stages throughout retirement allows you to secure income at higher rates as you age. You may also find that you qualify for an enhanced annuity at some point during your retirement which would give you a higher income.”

What it means for savings

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“Remortgagers, holding out hope for a swift drop in inflation, followed by rapid rate cuts, are set for disappointment. January is likely to have seen inflation cling on above 4%, encouraging mortgage rates to stay put too.

The quick-fire mortgage cuts we saw at the start of the year have already stalled, and the average rates have risen very slightly as the market digests the fact inflation is proving tough to shift, and realises that it might take a little longer than they’d expected for rate cuts to kick in.

Inflation is likely to drop this spring, as energy price falls take the pressure off. The trouble is that we’re expecting it to bounce back shortly afterwards, and the Bank of England has said the blip isn’t going to persuade it to cut early or frequently – because it wants to see something more sustained.

It doesn’t mean the Bank of England is considering raising rates, or that mortgage rates will stop trending downwards. It may just take longer for mortgage rates to fall.

For those with a remortgage on the cards, it means you can’t rely on major rate cuts in the immediate future to do the hard work for you. You will need to factor in for rates to be higher for longer, and address the best way to handle this – whether it’s a switch to a tracker in the hope of future rate cuts, or whether you need to talk to your lender about more significant changes to make ends meet while rates are at this level.”

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