Inflation has dropped to 1.5 per cent– what does it mean for savings and interest rates?
UK inflation rose at its slowest pace in almost three years in October.
That is good for household spending power and those looking to mortgage – but not for savers.
The Office for National Statistics (ONS) said consumer prices rose 1.5 per cent last month, against 1.7 per cent in September.
That is below the Bank of England’s two per cent target as well as under City forecasts for 1.6 per cent inflation last month.
It came after the energy price cap kept a lid on the price of electricity, gas and other fuels.
Gas and electricity prices fell by 8.7 per cent and 2.2 per cent respectively from October to September.
What does it mean for savers?
INFLATION-beating returns may not be here for long according to Moneyfacts.
The cost of living may sit below the Government target of 2 per cent right now, but it reckons savers who fail to lock into a longer-term fixed rate bond may find their cash gets eroded in the future.
Rachel Springall, finance expert at Moneyfacts, said: “Despite the forecasts that inflation will remain below target this time next year, if it were to hit or indeed breach the 2 per cent target, savers would need to lock into a fixed rate bond to beat it.
“Sadly for savers, fixed returns are plummeting, and this month is the first time in 18 months that the top rate offered on a one-year fixed bond has fallen below 2 per cent.”
“Our data shows that only one three-year fixed bond can beat 2.20per cent, as an expected profit rate from Al Rayan Bank. As fixed bonds continue to plummet, there is no telling how long this bond will remain on offer.”
Speed remains the key to securing a top interest return and not just on fixed rates.
The inflation decrease suggests households will have more spending power ahead of Christmas and next month’s General Election – especially as wages tick up.
It also raises expectations that the Bank of England might cut interest rates in coming months, City analysts have said.
That would be good news for those remortgaging or on a mortgage deal that tracks the interest rate.
Howard Archer, chief economic adviser for the EY Item Club, commented: “Inflation dipping more than expected to 1.5 per cent in October will also likely fan expectations that the Bank of England will cut interest rates before too long if the economy fails to pick up from its current struggles.”
Last week the Bank of England voted to hold rates at 0.75 per cent, despite two members of its Monetary Policy Committee (MPC) calling for a cut.
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