Cost of living falls
Inflation plunge creates rates poser for Bank
The new rate has created a quandary for the Bank of England which is widely tipped to raise interest rates to 0.75% next month on the back of rising wages and a robust UK economy.
Ed Monk, associate director for personal investing at Fidelity International, said: “The May MPC decision just became much tighter.
“CPI Inflation falling to 2.5% – faster than anticipated – is good news for households but a headache for rate-setters at the Bank of England, who clearly would like to raise rates next month.
“For workers and households, it underlines that that we are, at last, seeing our pay rise faster than our costs. In aggregate at least, were once again getting richer year-on-year.
“For the Bank of England, it reduces pressure to raise rates. The headline inflation rate has now fallen from 3.1% to 2.5% between November and March.
“While still above target, the trend seems clear. Yet the Bank appears intent on tightening in response to rising wages. It clearly sees real pay rising as an omen that headline inflation, which is still above target after all, could start to rise again.
“It’s probably also the case that it wants to create some headroom by raising rates now so that it has room to cut again if growth begins to slow.”
Jacob Deppe, head of trading at online trading platform Infinox, said: “Wth average wages rising by 2.8% in February and Consumer Price Inflation falling to 2.5% in March the squeeze on household incomes looks to be finally coming to an end.
“But the double dose of good news might be short lived. Wage rises are themselves inflationary and if they continue to rise the knock on effect will be that CPI ticks back up again in the months ahead.
“That makes it more likely the Bank of England will hike interest rates in May. And markets already give a rate rise in May an 85% probability.
“The question will then become whether we might see a second rate hike before the end of the year – most likely in the Autumn.
“Given the upward revision to GDP from the International Monetary Fund on Tuesday, the prospects for the economy look better than many had previously predicted. So a second rate hike in October or November can’t be ruled out.”
TUC General Secretary Frances O’Grady said the fall in inflation should encourage the Bank of England to hold back on interest rate rises.
“Wages are still worth less than before the financial crisis, leaving many working people struggling to get by,” she said. “A hike in interest rates is the last thing they need, and the fall in inflation shows the Bank of England should hold off.
“What people really need is higher wages, not higher interest rates.”
Calum Bennie, savings expert at Scottish Friendly, commented: “That inflation has fallen, against predictions, to 2.5% will be welcome news to hard pressed consumers as wage rises begin to match price rises.
“People shouldn’t let their guards’ down though – as the economy begins to return to a kind of pre-2008 normality, the prospect of higher interest rates looks increasingly likely and will eventually mean higher mortgage repayments, so people need to budget for this.”