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Inflation drops to Bank of England’s target for the first time in three years

Inflation in the UK has finally hit the Bank of England’s target, reaching 2% in May for the first time since July 2021. This marks a significant decrease from the peak of 11.1% in October 2022. The drop in inflation was largely driven by lower food prices, along with reductions in recreation and culture and household goods costs. However, petrol prices continued to exert upward pressure.

The Impact on Interest Rates
Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented, “It’s been a long time coming, but finally inflation has hit the Bank of England’s target. The last time inflation stood at 2% was in the run-up to the Euros in July 2021.” Despite this positive development, she noted that the Bank of England is unlikely to cut interest rates immediately due to concerns over wage inflation, which remains high at 6%.

Streeter added, “There will be concerns that services inflation has only retreated slightly, so although August remains a possibility for a rate cut, September is looking more likely.” The slight decrease in the CPI services rate, from 5.9% to 5.7%, supports this cautious outlook.

Homeowners Struggling with High Interest Rates
Paula Higgins, chief executive of the HomeOwners Alliance, has urged the Bank of England to lower interest rates, stating, “Stop holding homeowners to ransom and cut interest rates now.” She highlighted the significant strain on household finances due to increased borrowing costs. For example, the best rate for a two-year fixed mortgage in June 2023 was 4.82%, more than double the rate of 2.34% in June 2022.

The financial burden has led to a notable increase in repossessions and mortgage arrears. UK Finance reported that 870 homes were repossessed in the first quarter of 2024, a 36% rise from the previous quarter. Additionally, 96,580 homeowner mortgages were in arrears of 2.5% or more of the outstanding balance during the same period.

Calls for Immediate Action
Higgins expressed frustration over speculation that a rate cut might not occur until at least September, despite inflation nearing the target. “Inflation is no longer running at 10% – it’s almost at its 2% target. And yet the Bank of England continues to use it as an excuse to keep interest rates at the current 16-year high,” she said.

Ben Thompson, Deputy CEO at Mortgage Advice Bureau, also weighed in, advising those aiming to get on the property ladder or with expiring mortgage deals to act now. “Mortgage rates are unlikely to drop really significantly when the Bank of England does cut rates, so now is the time to get on the front foot, speak to a broker and get mortgage ready,” he recommended.

Nathan Emerson, CEO of Propertymark, echoed these sentiments, urging the Bank of England to inspire confidence by reducing interest rates promptly. “With inflation now back down to the levels initially targeted, Propertymark is extremely keen to see this now inspire a drop in interest rates,” he stated.

As the UK economy continues to navigate the complexities of inflation and interest rates, the coming months will be crucial for policymakers, homeowners, and investors alike. The anticipation for a potential rate cut grows, with many hoping for relief from the financial pressures that have dominated the past few years.