The Monetary Policy Committee will discuss the base rate on March 23
As inflation rises again and high borrowing costs impact the market, a senior Bank of England policymaker has said interest rates may need to be cut this year to alleviate mounting pressure on households.
Latest figures from the Office for National Statistics show that inflation jumped to 10.4% in the year to February.
Consumer Price Inflation had fallen to 10.1% in January, driving confidence that the interest rate hiking cycle is having the desired effect, so the latest rise came as a surprise to many.
Tomorrow, the Monetary Policy Committee will meet to discuss the base rate, with the latest data likely to influence its decision.
Inflation far from target
With inflation still very far from its 2% target, Michael Wales (pictured left), mortgages manager at Progeny, said there was little to suggest a base rate cut is by any means imminent.
He added that the median view of economists polled by Reuters in February was that there would likely be no rate cut until at least April 2024.
“It seems to me that inflation needs to fall considerably before the Bank of England would even consider cutting rates,” he said.
Impact of rate changes
Wales said predicted interest rate changes were generally priced into the market well in advance, hence why lenders were currently reducing rates even after the base rate had risen.
As such, he believed it was unlikely that a future base rate cut would have a significant impact on the majority of people looking to take out a mortgage.
“Ironically, even if there was a small base rate cut in the year ahead, many mortgage holders will still be facing the prospect of an interest rate rise, as according to the Office of National Statistics, 57% of fixed rate mortgages in the UK coming up for renewal in 2023 were fixed at interest rates below 2%,” Wales said.
Is a base rate reduction necessary?
While the Bank of England may have one eye on economic growth and living standards, Wales said its primary goal was to achieve the 2% inflation mandate.
Until the Monetary Policy Committee’s fears about ingrained high inflation start to fade, he believed it was unlikely that a base rate cut would be deemed the best course of action.
“From my own perspective, there appears to be no need to currently stimulate the mortgage market, which is surprisingly buoyant, following a definite lull last November and December,” he said.
Wales believed it was a reflection that people were adjusting to the current inflationary environment and realised that this was where we were for a while.
Alternate mechanisms to lower inflation
Katrina Horstead (pictured right), mortgage broker at The Mortgage Mum, said there were a number of alternative mechanisms the government could use to lower inflation, rather than continuing to increase the base rate.
“For example, the government could subsidise food and energy prices, which would make items such as food and fuel cheaper,” Horstead said.
Another approach was for the government to set limits on price increases; firms had continued to increase prices as much as possible to maintain profitability and deal with their own rising costs, which had resulted in inflation climbing further.
She added that the government could also increase the supply of money, which would theoretically lower the prices of goods and services.
Another method to reduce inflation was through increasing taxes, such as income tax and VAT, as well as the government cutting spending. This would improve the government’s budget situation and help to reduce demand in the economy.
However, increasing taxes was likely to be politically unpopular, which is why it was rarely used as a method to lower inflation.
Do you believe a reduction to the base rate is necessary given the current environment? Let us know in the comment section below.