Inflation set to fall, but interest rates should hold steady – OBR

Article by Jessica O'Connor in The Intermediary Online

The Office for Budget Responsibility (OBR) has said that inflation is likely to fall to 2% in the second quarter of this year, with movement in this direction expected as soon as next week.

However, according to the Bank of England, after this inflation is likely to rise again for the rest of the year.

As such, there has been widespread market speculation that the Bank of England will cut rates in June, with an aim to end the year at 4.2%.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ”We’re on a downwards escalator, with another drop in inflation expected, and an accelerated move lower forecast for the months to come.

“But Bank of England policymakers are still set to hold their position, and grip on to higher interest rates.  

“They will want more evidence that wage growth will ramp down further before they budge and bring in a rate cut.” She added: “The Office of Budget Responsibility, the government’s independent forecaster, reckons inflation will hit the Bank’s 2% target this quarter.

“However, this could be a short-lived dip, and prices could take off again.

“Potentially inflationary pressures ahead include the ongoing fight for talent, higher shipping costs due to Red Sea disruption, and the increase in the minimum wage and business rates.  “Increasing consumer and company optimism could see spending ramp up, potentially putting upwards pressure on prices.

“So, the name of the game will still be caution in the months ahead. Although a June cut is being pencilled in, a reduction in rates in August may be more likely, when the Bank also publishes the summer monetary policy report.

“Of course, the reticence over reducing rates sooner, given lacklustre growth, does mean that inflation could dip below target and that the economy will take longer to get going again, but for now it’s a risk that policymakers seem willing to take.”