The Bank of England’s Monetary Policy Committee has posted a 90-page report outlining its musings on the future for inflation and the economy.
On Thursday, the Bank cut interest rates from 5 per cent to 4.75 per cent, the lowest level for more than a year.
But it also published its quarterly Monetary Policy Report, an in-depth view on where it sees the UK economy going and how it plans to use interest rates to control inflation.
According to the Bank, measures announced by Rachel Reeves in the Budget will contribute to a rise in inflation, while GDP growth is expected to slow as the year rolls on.
We pick out five crucial charts you need to see – and explain what they mean.
Budget will boost inflation
Impact: The Bank of England said the Budget measures will have an impact on inflation
Consumer price inflation fell to 1.7 per cent in September, but is expected to increase to around 2.5 per cent by the end of the year ‘as weakness in energy prices falls out of the annual comparison’, the Bank said in its latest Monetary Policy Report.
It noted: ‘The Budget is provisionally expected to boost CPI inflation by just under ½ of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.’
The Bank added: ‘The impact of the Budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment.’
Looking ahead to 2025, the Bank said: ‘CPI inflation is expected to increase to around 2¾ per cent by the second half of 2025 as weakness in energy prices falls out of the annual comparison, revealing more clearly the continuing persistence of domestic inflationary pressures.’
The inflation forecast is vital in terms of understanding what the Bank of England may do with interest rates and how this could have an impact on mortgage rates and savings rates. These are heavily affected by market expecations on when interest rates will fall.
The UK economy to slow this year
GDP: The Bank said GDP growth looked set to slow in the latter half of this year
The UK’s economy is forecast to slow down but continue to grow and eventually get a small boost from the Budget.
The Bank said GDP growth was projected to slow in the second half of this year, to 0.2 per cent in the third quarter and 0.3 per cent in the fourth quarter.
It said: ‘Headline GDP growth has been volatile over the past year, with negative growth in 2023 before strong growth in early 2024.’
The Bank added: ‘GDP growth is projected to be broadly in line with Bank staff’s estimate of underlying momentum in the economy in 2024 H2, of around ¼ per cent per quarter. The latest indications from business surveys currently point to growth of around this rate.’
Looking further ahead, the Bank said GDP would grow.
It said: ‘The combined effects of the new measures announced in Autumn Budget 2024, including the additional funding for previous spending pressures, are provisionally expected to boost the level of GDP by around ¾ per cent at their peak in a year’s time relative to the August Report projections.
‘This reflects the stronger, and relatively front-loaded, paths for government consumption and investment more than offsetting the impact on growth of higher taxes.’
Just after the Budget, the Office for Budget Responsibility upgraded Britain’s economic growth forecasts for this year and next after the Budget, but downgraded forecasts for the following three years.
The OBR expects the economy to grow by 1.1 per cent this year, up from a previous forecast of 0.8 per cent.
Interest rates at 3.6% in three years
Global rates: The Bank set out projected global policy rates
The Bank said UK interest rates are likely to be set at 3.6 per cent in three years’ time, flatlining from roughly the end of next year.
In terms of what’s ahead in the short to medium term for UK interest rates, the Bank said: ‘Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate.
‘Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2 per cent target in the medium term have dissipated further.’
On global rates, the Bank added: ‘Since the August Report, fading inflationary pressures in the US as well as communications from the Fed have been associated with a shift down in the market-implied path for US policy rates of around 30 basis points on average over the next three years.’
The impact on mortgages and savings rates
Flowing through: The Bank outlined the impact of lower rates on mortgages and savings
Savers and borrowers keenly watch the Bank of England’s decisions and rate forecasts to see what next – particularly those with chunky mortgages on fixed rates due to end.
Lower interest rates ‘have been feeding through to household lending and deposit rates’, the Bank said.
It added: ‘Pass-through so far appears to be progressing in line with expectations, with interest rates for some retail products taking time to fall, reflecting the typical lags between reference rate changes and product rate changes.’
Instant-access deposit rates have, on average, fell by 11 basis points on average by October, a little under half of the reduction in interest rates.
On mortgages, the Bank said: ‘Interest rates for those on variable rate mortgages have fallen, however, and a growing number of those who are already paying higher rates may be able to refinance at a lower rate over the next two years.’
Around 800,000 fixed-rate mortgages currently with an interest rate of 3 per cent or below are expected to be refinanced per year, it added.
The Bank also noted that some mortgage-holders had started to reduce their spending in anticipation of a hike in their mortgage costs.
> Mortgage rate cut calculator: How will falling rates affect you?
House prices: A recovery in the housing market
House prices: The Bank said house prices had risen amid lower mortgage rates
Amid lower mortgage rates and a recovery in mortgage approvals, house prices have continued to pick up, the Bank said.
It added: ‘The recovery in house prices partly reflects a waning drag from past interest rate rises, consistent with the impact of higher interest rates having materialised more quickly than in the past.’
The Bank added: ‘The recovery in housing market activity has led to a small turnaround in the growth rate of secured lending to households.
‘Secured household lending growth remains weak in real terms, however, and has been negative since late 2021. A continued pickup in housing market activity should lead to a strengthening in secured lending growth.’
The OBR expects property price growth to stutter next year.
It said after the Budget last week: ‘In our central forecast, we expect house price growth to fall back slightly from 1.7 per cent in 2024 to 1.1 per cent in 2025, as the average effective mortgage rate continues to rise.’
Data from the Office for National Statistics in September showed average house prices increased by 2.8 per cent to £293,000 in the year to August, up from 1.8 per cent in the year to July.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
This article was originally published by a www.dailymail.co.uk . Read the Original article here. .