Interest rates could be cut this spring as UK inflation holds steady and food prices fall

Bank of England policymakers remain concerned about wage inflation and external economic pressures.

Relief for hard-pressed borrowers and businesses could come as early as June after reassuring news on the inflation front.

Analysts described January’s unchanged annual inflation rate of 4 per cent as “encouraging”, coming as it did against expectations for another slight increase, to 4.2 per cent, following December’s upturn from 3.9 per cent. The latest official figures showed that food prices fell last month for the first time in almost two-and-a-half years.

While the headline inflation rate remains double the Bank of England’s 2% target, hopes are building that the lack of any new shocks could persuade policymakers to opt for a cut in interest rates in the coming months. However, while prices appear to be cooling, wages are still rising at a faster rate and there could still be inflationary fallout from global events such as the current conflict in the Red Sea.

The Office for National Statistics' data for January revealed a monthly drop in food prices of 0.4 per cent - the first since September 2021. Picture: Greg Macvean

At the start of this month, the UK’s central bank voted to hold the base rate at 5.25 per cent for the fourth time in a row and following 14 consecutive rises. While those with savings have been benefiting from higher interest rates, they have had a negative effect on the millions of householders and companies with mortgages and borrowings.

On the positive front, most experts are expecting a downward trend in inflation over the next few months and with little to no growth in the economy the Bank of England may be pushed into cutting rates as early as late spring.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said inflation was expected to “dip significantly lower” in the months to come, towards the Bank’s 2 per cent target in the spring, when lower wholesale gas prices feed into the figures. But she warned: “That’s not the end of it though, unfortunately, because after hitting the target it’s expected to bounce back, and take a while to drop back again. As a result, the Bank of England has already said it’s not going to cut in a hurry.

“A surfeit of caution means they won’t cut until lower inflation has bedded in, and we’re a fair way from that. There are still some economists forecasting a cut as early as May, but there’s every chance we won’t see this until the second half of the year. The market has also started pricing in fewer rate cuts by the end of the year.”

The Bank of England faces a tricky balancing act on interest rates but a cut could come as early as the spring.

Clive Black, head of consumer research at brokerage Shore Capital, noted: “[Inflation] has come in at 4 per cent, a little below consensus expectations. Whilst the faster money will fret around the edges, we see this as a sound position with inflation in much more comfortable territory for consumers and businesses alike, almost in fact in Goldilocks territory.

“Quite whether the [Bank of England’s] monetary policy committee (MPC) feels the same, well who knows? We continue to expect, external shocks aside, more stable and easing [inflation in 2024] with a first interest rate cut by the end of June. The outlook is brightening as living standards rise.”

Kevin Brown, savings specialist at Glasgow-based mutual Scottish Friendly, said there may be some concern that the MPC will need to “turn the heat up even higher” in the shape of further rate rises to throttle inflation. “Mortgage borrowers and the wider UK economy will be hoping not,” he added, “as higher mortgage repayments and the potential for a recession are both likely to cause problems for many families. On the flip side, if rates stay higher in the short-term inflation beating options for cash savers remain available and many may still feel the attraction of easy access cash in times of economic uncertainty.”

The Office for National Statistics’ (ONS) data for January revealed a monthly drop in food prices of 0.4 per cent - the first since September 2021 - with the cost of bread and cereals, cream crackers and chocolate biscuits falling. While food and non-alcoholic beverage prices are still 7 per cent higher than a year ago, the category saw the slowest rate of increase since April 2022. On a monthly basis, food and non-alcoholic beverage prices fell by 0.4 per cent between December and January.

Despite the most recent fall, food and non-alcoholic beverages are around 25 per cent more expensive than they were in January 2022. In the entire decade before that, prices only rose around 10 per cent. The current cycle of inflation saw the annual rate peak at 11.1 per cent in October 2022 - marking a 41-year high.

ONS chief economist Grant Fitzner said: “Inflation was unchanged in January, reflecting counteracting effects within the basket of goods and services. The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May.

“Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years. All of these factors combined resulted in no change to the headline rate this month.”

Chancellor Jeremy Hunt said: “Inflation never falls in a perfect straight line, but the plan is working. We have made huge progress in bringing inflation down from 11 per cent, and the Bank of England forecast that it will fall to around 2 per cent in a matter of months.”