The inflation rate has dropped to 2%

The inflation rate has dropped to 2%

The latest inflation figures from the Office for National Statistics (ONS) have been released. These show that UK inflation has fallen from 2.3% in April to 2% in May. This means that the rate has finally met the Bank of England’s target of 2% after almost 3 years. This welcome news is a day ahead of the next meeting to review the base rate. So how might this affect the decision to lower interest rates?

Will interest rates come down?

The UK base rate has remained at 5.25% since August 2023. This decision by the Bank of England (BoE) has been to ensure that inflation continues to decrease and get under control. As inflation has now fallen to meet the BoE’s 2% target, it shows that this method has worked. Now, it’s essential to prevent it from rising back up again.

As such, many analysts expect the Monetary Policy Committee to hold the base rate at 5.25% in their next meeting. This would be the seventh consecutive decision to do so if that’s the case.

A cut to interest rates isn’t expected until August with some experts believing it may be pushed back to September. One main reason for this is related to wage growth. Wage growth, which drives up inflation, was higher than the predicted amount last month. The general feeling is that if interest rates are cut too quickly, inflation could increase again later in the year.

What does the UK inflation drop mean for households?

With many households struggling financially, the drop to 2% is welcome news. Whilst prices are still rising, they’re now doing so at the slowest rate since July 2021. The main reason for the latest inflation rate drop has been a slowdown in price increases for food as well as soft drinks, household goods, furniture, recreation and culture.

However, if interest rates aren’t reduced, the pressure still remains on homeowners during this cost of living crisis. Those who currently have variable-rate deals won’t benefit from the hoped-for decrease in their payments in the immediate future. And with a delay expected in interest rate cuts, it’s unlikely that mortgage rates on new fixed-rate deals will be reduced by lenders.

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