Experts forecast ‘perfect’ inflation outlook but issue winter warning | Personal Finance | Finance

Inflation is set to hold steady at around 2 percent when figures are announced next week with significant implications for savings, mortgages and annuities.

Financial experts suggest Britain faces a benign economic outlook through the rest of the year, which savers and borrowers need to take advantage of.

While most of the figures look positive, there is a risk that prices could begin to rise again towards the end of this year against a background of firms passing on the impact of increases in staff pay and energy bills.

Impact on savings

Mark Hicks, head of Active Savings, Hargreaves Lansdown: “It’s a perfect scenario for savers at the moment with inflation continuing to fall and savings rates trending higher in recent weeks.”

Mr Hicks continued: “Both easy access rates and fixed terms have started to creep up in July, driven by intense competition at the top of the market which savers should be taking full advantage of.

“This means savers are consistently getting above double the rate of inflation returns, which increases the attractiveness of holding cash in your portfolio.

“There are still multiple fixed and easy access rates across the savings market that offer returns in excess of 5 percent.”

But he warned: “As we get closer to a base rate cut, I’d expect to see the easy access market implement cuts much more swiftly.

“However, the recent increase in competition at the top of the market could present a pleasant surprise as savers are presented with some very attractive products for that little bit longer.”

Impact on annuities

“Low inflation is important for anyone living on a guaranteed income such as an annuity,” according to Helen Morrissey, head of retirement analysis, Hargreaves Lansdown.

“Over time it will nibble away at your purchasing power and so the lower it is the better.

“Pensioners have had a rough ride in recent years with inflation topping out at 11.1 percent – this didn’t so much nibble away at their income as bit out huge chunks and left many people having to make big cuts to their spending in a bid to make ends meet.

“However, even though the inflation beast looks tamed for now it doesn’t mean it shouldn’t be factored into your retirement planning.”

She said that “level annuities” offer higher starting incomes than their inflation linked counterparts though a product linked to prices will grow over time whereas a level one will not.

The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,217 per year from a level single life annuity with a five-year guarantee. In contrast, one linked to RPI offers a much lower £4,513 as a starting income.

She said while the difference may put off many people, the RPI option might pay out more as it rises in line with inflation over 20 years.

Impact on mortgages

Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “Inflation is expected to come in roughly around 2 percent next week, which would be unlikely to change expectations significantly around the timing of the first interest rate cut.

“Right now, there’s around a 50 percent chance that rates will come down in August, and if not, it’s likely to be September.”

She said: “This will be welcome news to anyone who remortgaged onto a variable rate early this year – when rate cuts were expected to be just round the corner – who will have been on tenterhooks ever since.”

However, she warned: “Movement isn’t likely to be quick, with no more than a couple of cuts in 2024. There’s also the chance of a longer pause if wages are pushed up by changes to the minimum wage or if economic growth surprises on the upside.”

Ms Coles said a number of high street lenders have cut mortgage rates in recent days.

She said: “Part of this is a price war during a busy time for the markets ahead of the school holidays. Part of it is the fact that the first forecast rate cut is inching closer, and lenders are factoring in lower rates throughout the fixed period.

“If you have a remortgage looming, this will be a welcome development. But with so many uncertainties ahead, it might be worth agreeing a rate now.

“That way if rates come down ahead of your deal expiring you can find a better offer, but if they drift up again in the interim you have locked in a more competitive deal.”

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