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What next for inflation and interest rates?


Updated on 03 November 2016 | 3 Comments

The Bank of England has pushed its inflation expectations higher over the coming years – what does this mean for your money?

Inflation is set to rise from 1% to around 2.7% by 2018, according to the Bank of England's latest quarterly Inflation Report.

The Bank has pushed its inflation expectations higher, but the rate is predicted to fall back gradually to 2.5% in three years' time and it looks likely that inflation will return to close to its target of 2% over the following year.

But Tom Stevenson, investment director of personal investing at Fidelity International, said that rising short-term inflation is unlikely for now.

As for the Base Rate, the Committee has voted unanimously to maintain the current rate of 0.25%.

At its August meeting, a majority of the Monetary Policy Committee (MPC) also expected to see a further rate cut in Base Rate at one of the remaining MPC meetings in 2016 if the outlook stayed in line with the one set out in the August report. Economists now reckon that another rate cut could come as early as the beginning of next year.  

Brexit effect

While the UK economy has performed better than expected overall in the months following the referendum, inflation is predicted to be higher due to the depreciation of sterling that has come following the decision to Brexit.

The Bank says that Britain's access to EU markets could be "materially reduced", which could negatively affect economic growth.

This is partly because of the limits to which above-target inflation can be tolerated. Limits depends on the cause of high inflation, knock-on effects on inflation expectations and domestic costs and the scale of the shortfall in economic activity.

The future of monetary policy post-Brexit will depend on demand, supply and the exchange rate as they all affect the inflation rate.

What it means for your money

Household money

Lisa Caplan, head of financial advice at investment company Nutmeg, outlines how the Bank of England's predictions could impact household money going forward:

  • the price of imports like beer and Japanese televisions are expected to rise in price by 9% between now and early summer 2017;
  • clothing and food prices are expected to rise sharply;
  • we will have to tighten our belts as inflation rises restrict economic growth;
  • currency exchange rates are unlikely to recover in the near future, hitting the value of our holiday money.

However, the economic outlook is stronger than it was three months ago, which is promising for jobseekers. 

Tom Stevenson also says that economic activity is likely to dampen in the meantime as real incomes are 'crimped'. The Bank of England has forecast increased growth of 1.4% next year but cut its 2018 prediction from 1.8% to 1.5%.

Financial products

The record low Base Rate is good news for borrowers. Mortgage rates remain incredibly low compared to historical levels, but aren't likely to fall any further.

As a result, now is a cracking time to review your mortgage costs and see if you could save by remortgaging. Head over to the loveMONEY mortgage centre to see which deals you qualify for.

Personal loans are also available at incredibly cheap levels, while recent months have seen record 0% periods on both purchase credit cards and balance transfer credit cards. Check out The best 0% purchase credit cards and The best 0% balance transfer credit cards for more.

It's not good news for savers, and pensioners in particular, with the combination of low interest rates and higher inflation meaning rates on savings and annuities will continue to be poor.

The forecasts that rates aren't going to rise swiftly any time soon mean it might be worth considering fixed rate savings options.

If you haven't used your Cash ISA allowance for this tax year, you should probably look at that as your first port of call. Rates are similar, and in some cases better, than on savings accounts, with the added bonus of returns being tax free. 

For a range of cash savings options with different levels of risk and returns, take a look at Where to earn most interest on your cash.

Alternatively, a continued low-interest environment might mean it could be time to dip a toe into the stock market. Read our Beginner's guide to Stocks and Shares ISA for more.

What do you think will happen to inflation and interest rates next? Where are you putting your money? Share your thoughts in the Comments box below.

More on the economy and our money:

Where to earn most interest on your cash

Average income is now back to pre-recession levels

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Comments



  • 04 November 2016

    Too late to do much now. You should have bought Inflation linked savings certs years ago which are tax free and linked to RPI - I have £150K plus now.You should have opened a $ savings account in the Us and stashed you holiday cash there when the rate was good which I did,very small interest but good appreciation of capital. Well,you must cut consumption. Stop buying unnecessary clothes and electronic rubbish. Prices will soon tumble when the stocks mount up. Don't blink first.Food we must have - in the right quantity- so watch what you eat and shop carefully at the right shops do not accept the big supermarkets price rises and move to discounters. The buyer has power if they would only use it and not give in at the first increase. As for the £ well the UK is broke and the country lives only by pumping money into the system as others have said. There is no long term viability in the UK so buy a house and live in it . Probably should have emigrated like my son dd to the US - unless Trump wins of course!

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  • 04 November 2016

    Of course inflation is going to go up... The system is f**ked up, when you pump money in, (QE) you are devaluing money. Which then turns into massive inflation. I have said it for years, they are holding back the inevitable crash, a crash that is long over due, a crash bigger than the one in the early 00s interest needs to rise, the system will not correct until this happens. Yes it will cost lots of people their homes, but some bit off more than they could afford. Should also break quite a few BTL landlords who are not helping the system.

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  • 03 November 2016

    It won't. The economy is so bust there are deflationary forces at work. They are trying to talk up inflation as it's needed to make this phoney fiat currency work.

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