Inflation expectations point to slow mortgage rate cuts

Interest rates may have to fall slowly as consumers think inflation is at 3.9 per cent – compared to the true rate of 2.2 per cent.

The Bank of England's inflation attitude poll comes as grim reading for those banking on interest rate cuts ahead of remortgaging or relying on tracker mortgage rates falling, as the inflation expectation for the next year stands at 3.3 per cent - the highest level since the survey started in 1999.

When questioned on interest rates, 43 per cent expected the cost of borrowing to rise over the next 12 months, and only 20 per cent followed the analysts and predicted a fall.

Commenting on the figures, Howard Archer at Global Insight said: "The Bank of England regards containing inflation expectations as a key factor in holding down consumer price inflation over the medium term.

"In particular, the Bank of England is particularly concerned that a near-term sharp spike up in inflation resulting from higher energy, food and import prices will lift inflation expectations and thereby affect the medium-term behaviour of price and wage setters.

"The last thing that the Bank of England wants to see is a very damaging wage-price spiral developing."

He added the Bank's scope for cutting rates would by significantly reduced if inflation expectations continue to rise over the coming months.

James Caldwell, director of fairinvestment.co.uk, echoed this sentiment saying people should not bank on interest rate cuts.

"Many people see further rate cuts as a necessary means of easing pressure
on household budgets.

"The Fed has slashed rates dramatically in the US, and some people believe this should be replicated in the UK, particularly for those struggling with high mortgage payments."

He added: "The monetary policy committee's decision is not as
straightforward as people might think when it comes to setting the base
rate.

"Inflation must be taken into consideration, as must the country's general economic condition. Therefore, it is likely that rates will be cut with an air of caution if there are to be further reductions this year."