Pavel Barter
Interest rates could drop to 3% by the end of next year but will not return to the abnormal lows felt during the pandemic, it’s been claimed.
The current base rate of 5.25% has largely been fuelled by high inflation. But the latest figures show that is now falling.
The latest consumer prices index (CPI) measure of inflation slowed to 3.2% in the 12 months to March.
Andrew Bailey, governor of the Bank of England (BoE), recently signalled “encouraging signs” that inflation is falling and indicated the Bank’s Monetary Policy Committee (MPC) does not need to reach its 2% inflation target in order to cut interest rates from 5.25%.
“I think by the end of 2025 we’ll be looking at about 3.5%.” Andrew Webb, chief economist at Grant Thornton Ireland, said.
“By the end of 2025, the consensus is that it will be around 3%, maybe hovering around 3.25%. That could bring positive change to people who are impacted.”
Dr Esmond Birnie – senior economist at Ulster University and a member of the Northern Ireland Fiscal Council – struck a note of caution. “Some reduction later on in 2024 is likely but maybe not by as much as people had previously hoped. It’s 5.25% at the moment. I wouldn’t expect more than 0.5% decline by the end of this year.”
The Bank’s base rate rose in tandem with high inflation. But in February inflation dropped to 3.4%: its lowest level in over two years. In March, global consultancy firm Kantar indicated that grocery priced inflation had fallen to 4.5%, its lowest level since February 2022 (down from a peak of 17% in March 2023). In its annual report, Tesco announced food inflation has “lessened substantially”.
Richard Ramsey predicts inflation figures “at or close to 2%” are imminent. “At the turn of this year, or early next year, we could see them going below 1% which is below the MPC’s target. The Bank of England is thinking, ‘If inflation is falling, we need to start reducing interest rates because higher rates are slowing down the economy and impacting on consumer and household spending’.”
However, anyone expecting a return to the bargain basem*nt lows of the early pandemic may be disappointed. “People shouldn’t think we are going to go back to those abnormal lows when bank rates were at 0.1%,” Richard Ramsey says. “That was a freak occurrence.”
