What do recent inflation trends mean for cash interest rates?

UK CPI inflation remained at the Bank of England’s 2% target in June 2024, as higher interest rates continue to dampen price rises.

A continuation of the lowest reading of inflation for almost three years will offer comfort to the Bank of England (BoE) that its quest to contain price rises is bearing fruit, and that it can start cutting interest rates in due course.

However, it’s not quite time to pop the Champagne corks in Threadneedle Street. There are two sides to the inflation story. While goods inflation, including food, has come under control, core CPI (excluding energy, food, alcohol and tobacco) remains robust, indicating lingering pressures.

Meanwhile, services inflation has also stayed relatively high as wages, the key input into service costs, have risen. The latest data shows some signs of a slowdown but not a dramatic one, the latest reading of annual wage growth being 5.7%. Although good wage rises benefit many households, the extra spending power can fuel inflation and the BoE will be keeping the employment market under scrutiny.

What does it mean for households?

More subdued inflation is a great relief for households that have battled post-Covid cost of living challenges. With wage rises now outpacing inflation there’s an opportunity to rebuild reserves and get finances on a sounder footing.

Many households and businesses will also now be hoping for an interest rate cut at some point soon, which will relieve some pressure on those with variable rate mortgages in particular. However, unless the global economy takes a significant turn for the worse, we think rate cuts will only be fine tuning rather than deep, owing to the overall stickiness of inflation.

Read more: Global market predictions for 2024

When will the Bank of England start cutting interest rates?

While the burst of high post-Covid inflation is behind us, several factors stand in the way of it staying to target. These include the resilient jobs market keeping wages buoyant, an improved growth picture for the UK economy, the more fractious geopolitical landscape, and the lingering effects of reconfigured post-Covid supply chains.

There trends will limit the extent of rate cuts and mean households and businesses will need to battle against higher borrowing costs relative to much of the past decade. Stubborn inflation in some areas has also divided BoE economists on when its safe to cut interest rates without risking a reacceleration in prices. At present market numbers show a fine balance between the likelihood of the first cut coming in August or September.

Read more: What are interest rates and why have they risen?

How does inflation impact savings rates?

For savers, there’s a positive current environment of inflation-beating returns from cash as price rises continue to recede and interest rates remain elevated. It’s a case of making hay while the sun shines, though. With interest rate cuts now close at hand it is only a matter of time before cash returns fall, so savers should take full advantage while they can.

As we draw closer to a base rate cut, the best easy access rates will probably fall. Reductions have already started happening in some quarters with certain high street banks cutting quite aggressively. Fortunately, there are still some good rates available, but it does mean shopping around. A cash savings platform like Charles Stanley Direct Cash Savings could assist you in getting a competitive deal. For instance, the best available easy access rate at the time of writing is 4.81% AER.

If you are considering a fixed rate, which involves locking your savings away for a set period, then it might pay to act sooner rather than later. There are still options around the 5% mark and if interest rates are cut that could be attractive versus where they end up in six- or twelve-months’ time. Nothing is certain but it’s unlikely you’ll get a better rate by waiting.

One way to bag competitive savings deals

Moving your cash around different banks and building societies to get better rates can be a pain, but there is another way. A cash savings platform offers a range of cash saving accounts with different interest rates from a variety of providers all in one place.

• Manage your savings in ‘marketplace’, moving between accounts with ease. However, if you place money in a fixed term account you won’t be able to switch provider until the term ends.
• Mix and match a range of terms from instant access to five years through one secure account
• A single application, identification check and log in
• A selection of top tier interest rates available from high street and challenger banks
• Minimums starting from just £1

Find out how Charles Stanley Direct Cash Savings powered by Bondsmith could help you find better returns on your cash.