Interest Rate Cut Looks Very Unlikely
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We all knew that prices were rising but today's inflation numbers were worse than many economists had expected.
The government's favourite measure of inflation -- the consumer price index (CPI) -- has jumped from 2.5% in March to 3% in April. In other words, prices in April were up 3% compared to a year earlier. Economists had expected the April inflation number to rise to just 2.6%, according to a survey by Bloomberg.
Interest rates
I'd now be very surprised if the Bank of England cut its base rate from 5% in the next few months.
The Bank is supposed to keep inflation within the 1% to 3% band and the base rate is its tool. If the base rate was cut now, consumers would feel richer, spending would rise, and the demand for goods would go up. That would push up prices....
Mortgage rates
In normal times, variable mortgage rates tend to follow moves in the base rate (with some delays.) Thanks to the credit crunch, we don't live in normal times, so the cost of home finance has risen.
And today's news means that widespread cuts in mortgage rates have become less likely in the near future. So if your current mortgage deal is set to expire soon, it makes sense to shop around and try and get the best mortgage deal you can.
Investment
Today's news is bad for the stock market too. The price of imported raw materials such as oil rose 2.4% in the month of April alone. Businesses must either pass on those rises to their customers or accept lower margins, which will hit profits.
A relatively high base rate also makes it more expensive for companies to borrow, invest and grow.
As I write, the FTSE 100 index is down 55 points to 6165 points. As the economic outlook continues to get gloomier, my hunch is that share prices will fall over the next few months. (That said, predicting short-term stock market moves is a mug's game. There's a decent chance I'll end up with egg on my face!)
The good news
There are two groups of people who stand to benefit from today's news.
Firstly, savers. There are some great savings accounts out there including three instant access accounts that are paying 6.5%. Visit our savings centre and join the party!
And secondly, first-time buyers for homes. Unchanged interest rates are another blow to house prices, so things look set to get worse here too. But if you're a potential first-time buyer, house prices may fall to a level where you can afford to buy in the next couple of years.
True, the best mortgage deals are only being offered to purchasers who can pay a deposit right now. But that's all the more reason to start saving now!
More: Sexy Savings At 7% | Why Rate Doesn't Rule For Mortgages | Base Rate Cut To 5%
