Five Questions About: Inflation

What has happened to inflation?

Consumer Price Index (CPI) inflation fell for a second month in a row in June, by 0.2 per cent to 3.2 per cent, although it is still far above the Bank of England's 2 per cent interest rate target.

How could this affect the base rate?

The Bank's Monetary Policy Committee was under pressure to raise the base rate from the historic low of 0.5 per cent, where it has been for 16 months, to curb rising inflation. However, the Government expects inflation to fall back to its 2 per cent target this year. It has dropped for two consecutive months, which reduces the pressure on interest rates. Many economists believe it could be next year before the period of historically low interest rates comes to an end.

What would that mean for savings?

High inflation and a low base rate are a toxic combination for savers. Returns on savings fall, while inflation eats away the value of their money. The best returns are still in fixed-rate bonds, but the best rate now may not be so competitive in a few years, making longer-term fixes a gamble.

How could this affect borrowers?

Low interest rates are great news for those with mortgages. Anyone with a variable rate tracker or discounted loan will be hoping base rate stays at 0.5 per cent for as long as possible because their mortgage payments will become more expensive as soon as it starts to rise.

What about those looking for a mortgage?

It is also a good time for them. Fixed-rate deals are at an all-time low, says the Bank of England, with the market-leading two-year fix at just 2.69 per cent. Of course, many people are trapped in negative equity and cannot renew a mortgage or move home, while would-be buyers need a deposit of at least 15 per cent to qualify for a decent interest rate.

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