Inflation and Bank interest rates

The Office for National Statistics has just reported that the consumer price index fell from 3.5% in January to 3% in February. This adds weight to the Bank of England’s view that price pressures will continue to fall this year as the recessions continues to drive a fall in demand and consumer spending. Further drivers were falls in gas prices and lower rises in food prices.

The Bank’s most recent forecasts suggest that inflation may fall to less than 1% unless oil prices rise sharply or sterling falls again. This sounds like good news bearing in mind the low rates of return from all deposit accounts. However, with inflation now heading back well towards its target the Bank is very likely to keep base rates at 0.5% until next year thus keeping interest rates down.

On the other hand, if you are in a tracker mortgage and your mortgage rates are at all time lows this may be a good time to start paying off capital. At some point the recent quantitative easing may well rebound causing inflation and thus interest rates to rise sharply. A lower mortgage at that time will help.