STRUGGLING Islanders received a long-awaited glimmer of hope yesterday after a surprise drop in UK inflation saw the Bank of England freeze interest rates for the first time in almost two years.
Following 14 consecutive hikes which have added hundreds of pounds onto some monthly mortgage payments, the base rate was held at 5.25%.
The rises have been implemented in a bid to encourage saving and reduce spending to stem runaway inflation, which has seen the cost-of-living rise at its highest rate for 40 years.
With inflation now falling in the UK and Jersey, where it dropped from a high of 12.7% in December and March to 10.9% in June, some analysts believe that interest rates may now have peaked, although the Bank of England has not ruled out a further rise.
Speaking to the JEP yesterday, Tom Holvey, chief economic adviser to Jersey’s government, said: ‘We hope inflation has now peaked, is coming down and will continue to come down for the foreseeable future.
‘We think interest rates have nearly peaked in the UK and that does have a direct impact on us.
‘While inflation influences our figures, interest rates are the same as the UK so whatever is set by the Bank of England is our interest rate as well.
‘If they haven’t peaked, they shouldn’t be going up a great deal further, all other things being equal.
‘With the economy as it is we might expect perhaps one more rise but not many more.’
Despite optimism that rates have peaked, Bank of England governor Andrew Bailey sounded a cautious note and left the door open to further rises, promising to ‘take the decisions necessary’ to return inflation to normal levels.
He added that it was ‘very, very premature’ to consider reducing rates.
Meanwhile, Mr Holvey said that Jersey’s next inflation figure, released in October, would be ‘really important’ as it would give a clearer indication of whether there has been a sustained decrease in inflation.
In particular, he said, it would indicate whether the Island was in a ‘wage-price-spiral’, where wage increases cause price rises which in turn fuel further rises in inflation.
‘We don’t think that’s happening but we would like the next set of figures to confirm that,’ he said.
Islanders trying to get onto the property ladder or remortage are also starting to benefit from increased competition among banks following turmoil in the lending market in 2022 and the early part of this year.
‘While interest rates are now easing off, but are still relatively high, we are starting to see competition re-enter the market within the banks for customers,’ said Mr Holvey.
‘That means while they were very worried before and ramping their interest rates up above market rates at times because they expected them to go up, we are now seeing that competition element start bringing them back down because they want to capture the customers.
‘Despite the fact that interest rates have been high and might go up one more time, banks have factored that in and are now seeing how competitive can we be to get the fixed rates down to a competitive level. We are now seeing that market settle which will be good for consumers.’