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Bank of England: inflation to fall but pay to rise
Inflation is to fall to 1% within the next six months and wage growth is to pick up, the Bank of England has forecast in its latest quarterly Inflation Report. But an interest rate rise now looks further away.
“First, real take home pay growth is in prospect,” Bank of England Governor Mark Carney said at the press conference to launch the report. He cited drops in the cost of food, energy and imported goods as supporting that change.
The bank is forecasting pay to increase from zero now to around 2% by the end of 2015.
The Governor sounded a note of caution though, saying: “One swallow doesn’t make a summer. This has to persist for the recovery to be durable.”
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Interest rate rise recedes
The bank’s interest rate-setting Monetary Policy Committee (MPC) still believes there is “spare capacity” in the economy. That and low inflation are the main reasons why rates are likely to remain on hold well into next year.
The Governor reiterated again the “gradual” increases expected in Base Rate. Forecasters are now predicting increases beginning in late 2015, rising to 2.5% by the end of 2017.
Inflation to keep falling
The Governor says that the bank does not “expect a rapid return of inflation to the target”. In fact, its latest projection shows inflation not returning there until mid-2016.
This is contrary to the Treasury’s latest compilation of forecasts, which has inflation back to 2% by the end of 2015, although they were compiled last month.
While “economic conditions here continue to normalise”, the bank has warned of the threat of “economic stagnation” from Europe, which could affect what it has forecast. There is also the political situation in Russia and Ukraine, which could affect oil prices.
What this means for you
Continued low interest rates are great for people who are on variable or tracker mortgages aligned to the Bank of England Base Rate. If you can afford to take advantage of this and you’re allowed to overpay, you could save thousands of pounds in the long run.
However it’s also worth noting that fixed mortgage rates continue to fall, as lenders compete for customers. It could be worth your while seeing whether a fixed rate could be cheaper and lock in before Base Rate rises.
It’s important to point out though that the mortgage approval process is now much stricter, so you will need a decent credit history as well as a reasonable deposit or equity in your home to be offered the best rates.
For savers, the news isn’t so great again, although at least the prospect of lower inflation means your savings buy more if you hold them in cash. It’s worth shopping around and looking at the likes of current accounts and peer-to-peer accounts, although bear in mind the lack of a compensation scheme for the latter, if you want a better return.
If you’re after longer-term returns and don’t mind risk, investing costs continue to fall, so opening a stocks & shares ISA has arguably never been cheaper.
