Inflation rises: Pressure on borrowers, boost for savers

Inflation has climbed for the second consecutive month, driven by the rising costs of fuel, clothing, and concert tickets, amongst other things. Official figures show the rate of inflation increased to 2.6% in November, up from 2.3% in October, nudging further above the Bank of England’s target of 2%. While this rise was anticipated by economists, it places further strain on households already grappling with the cost-of-living crisis. 

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The combination of higher rents, tobacco duties, music tickets, and rebounding petrol prices contributed to this uptick. Yet, with services inflation holding steady at 5%, well above the level consistent with the Bank of England's long-term goal, the decision this week by the Bank’s Monetary Policy Committee (MPC) to keep the base rate at its current level of 4.75% at the last meeting of 2024, was no shock. 

Despite the recent rise in inflation, things are better compared to 2022, when inflation peaked at over 11%. However, Chancellor Rachel Reeves has acknowledged the continuing struggle for many households. It’s important to remember that a falling inflation rate doesn’t mean prices are dropping—only that they’re rising less quickly.

Implications for interest rates 

The Bank of England’s base rate currently sits at 4.75%, a level considered restrictive. While markets were anticipating significant rate cuts in 2024 and 2025, just a few months ago, recent inflation figures have tempered those expectations. Michael Saunders, a senior policy adviser at Oxford Economics and former member of the MPC, explained: 

“The MPC were unlikely to move interest rates anyway, and the fact that inflation is higher than expected reinforces their tendency to keep rates on hold for this meeting.” 

Looking ahead, Saunders predicts a gradual easing of interest rates: 

“I still think they [the MPC] will be cutting rates during the coming year, but the debate is over how far [these cuts will go]. Services inflation remains stubbornly high at around 5%, which complicates the Bank’s ability to lower rates to a more neutral level—likely somewhere between 3% and 3.5%.” 

This means savers can likely expect rates to remain competitive in the short term, even as borrowers feel the pinch of higher financing costs. 

Good news for savers 

For savers, the persistence of higher interest rates continues to provide opportunities. Top fixed-rate bonds are offering slightly better returns than a month ago:

• 1-year bonds: Up from 4.76% to 4.80%
• 2-year bonds: Jumping from 4.52% to 4.64%
• 3-year bonds: A modest increase from 4.60% to 4.62% 
• 5-year bonds: Rising from 4.49% to 4.52% 

While these increases are not dramatic, they signal stability in savings rates—welcome news for those locking in their cash now. 

What to expect 

Earlier this month, the Bank of England Governor, Andrew Bailey, indicated the possibility of four rate cuts in 2025, which could bring the base rate down to 3.75% by the end of 2025. However, as always, the economy remains unpredictable, with inflation, wage growth, and global factors all poised to influence future decisions. 

For savers, this means a window of opportunity to secure attractive fixed-rate deals. As inflation remains above target, locking in a competitive rate now is a decision unlikely to be regretted. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash advice.

The accounts and rates mentioned in this article are accurate and correct as of 20/12/2024.