Bank of England signals a huge change to the outlook for inflation, bringing relief to mortgagors but little joy for workers 1 February 2024 The Bank of England’s latest economic outlook will bring relief to consumers and mortgagors, as forecasts for inflation and interest rates have been revised down, but not so for workers as pay growth has also been revised down – by £400 a year by 2026 – the Resolution Foundation said today (Thursday). Today, the Bank held interest rates at 5.25 per cent, but hinted that rate cuts could start earlier than previously expected. The confirmation that rates have peaked and will start falling will bring relief to those having to remortgage this year. While their annual mortgage costs are still set to rise by around £1,800 on average, this is considerably less than the £3,000 rise they faced last summer when market expectations for interest rates peaked. The revised outlook for inflation – in which it is now projected to return to its 2 per cent target in May 2024, rather than Q4 2025 – will bring widespread relief that the UK’s painful two-year battle with high inflation is finally coming to an end. However, with falling inflation driven in part by falling wage pressure – the Bank has also revised down its forecast for private-sector nominal wage growth by 1.2 percentage points in Q1 2024 – workers are unlikely to see the fruits of falling inflation in their pay packets. The Bank has also revised down its medium-term forecast for real wages for 1.5 per cent – or £400 a year – by 2026. James Smith, Research Director at the Resolution Foundation, said: “Today the Bank signalled that it now expects inflation to return to the 2 per cent target in May, rather than late in 2025, that interest rates have peaked, and hinted that rates could start falling sooner than previously expected. “This will bring good news for those 1.5 million people having to remortgage this year, who will see smaller cost rises than they might have feared, while lower prices will be a relief to everyone. “But there is a sting in the tail for workers. With lower price pressures partly being driven by lower wage growth, workers are unlikely to see the fruits to lower inflation in their pay packets. In fact, real wages are forecast to £400 a year lower by 2026. The route to stronger wage growth will instead have to come from the hard yards of higher productivity.”
