Major interest rate cut boost - despite big caveat to UK inflation drop | Money

Investors are now expecting four interest rate cuts by the end of the year, taking the base rate to 3.5%. 

Before this morning's inflation data, they were expecting three cuts - and just a month ago it was two.

Inflation, which as we have been reporting dropped in March, is forecast to rise again in April due to bill hikes and other factors.

But as well as inflation, the global economic uncertainty caused by Donald Trump's tariffs is also having a big impact on where markets expect rates to go.

Markets are pricing in an 87% chance of a cut at the next Bank meeting on 8 May.

Rob Morgan, chief analyst at investment management firm Charles Stanley, says a 0.25% cut to 4.25% looks "highly likely," though the picture is "much hazier" for the rest of the year. 

He warns that inflation is forecast to move in the wrong direction as soon as next month, as we start to see the impact of bill increases that came into effect in April. 

"The inflation rate is expected to jump to 3.6% when April's data is released next month and could hit 3.75% in the third quarter, according to the latest forecast from the Bank of England," he says. 

"The Bank has already said regulated price rises and the effects of the budget could add around half a percentage point to the inflation rate by the second quarter.

"Many businesses will now be in the process of passing on NIC and minimum wage rises, which could fan the flames of services inflation and limit how far policymakers can go in terms of rate cuts." 

He explains that job market data, which was released yesterday, and the effect of Donald Trump's global tariffs will also affect the Bank's interest rate decision. 

"Overall, the Bank will be taking an open-minded view of the effects of these factors on the economy and on inflation," he says. 

"It will probably look past any one-off price shocks from tariffs and focus on the bigger threat of weak growth.

"Favourable movements in both the price of oil and the recent strength of the pound in currency markets may further embolden policymakers to take slices off interest rates as the year progresses." 

One of the biggest drivers of the fall in inflation over the past year was recreation and culture activities, the latest ONS data shows. 

Price rises in this sector slowed to 2.4% in March, down from the 3.4% recorded in the year to February.

The transport, restaurant and hotels and communication sectors also helped bring inflation down. 

The ONS said slower rises in the price of petrol also contributed. 

However, a lot of this was offset by the price of clothes, which "rose strongly" after a surprising decrease in last month's figures. 

Prices had fallen by 0.6% in the year to February, but the latest figures show they were rising by 1.1% in March. 

You can see a breakdown of all the divisions used to calculate inflation below... 

This morning's figures will provide some relief to Rachel Reeves, who has faced criticism over the stalling economy.

She's just released this statement: "Inflation falling for two months in a row, wages growing faster than prices, and positive growth figures are encouraging signs that our Plan for Change is working, but there is more to be done.

"I know many families are still struggling with the cost of living and this is an anxious time because of a changing world. 

"That is why the government has boosted pay for three million people by increasing the minimum wage, frozen fuel duty and begun rolling out free breakfast clubs in primary schools."

On the face of it, these figures are good news, says our business and economics correspondent Paul Kelso.

Core inflation, which strips out "volatile" elements such as alcohol and fuel, was down to 3.4% (from 3.5% in February).

Services inflation, also important as it is largely made up of wages, dropped too - more than anticipated to 4.7% (economists forecast a drop from 5% in February to 4.8%).

But will it last? No, says Kelso. These figures are for March...

"April's next, and we all know what kicked in at the start of this month - water bill rises, a slightly increased energy price cap," he said.

"We have looming over all of the uncertainty still about what the trade war and what tariffs will do."

All the expectations are growth "will fall" and prices are "likely to rise" in the medium term, he said.

"So, these numbers - perhaps we should enjoy the respite for now," he said.

As Kelso says, many household bills went up at the start of the month, ranging from energy prices and council tax to mobile phone contracts and broadband. The Money team lays them all out here - and steps you can take to beat the hikes...

We've just learnt inflation eased to 2.6% in March. 

The fall was more than expected, with economists forecasting 2.7%. 

Where does that put the UK compared to other countries? 

It's not far off the US, where inflation was 2.4% in March. 

But it's a long way off France, where inflation is a low 0.9%. 

It should be noted that March's data does not include the raft of bill rises the came into effect at the start of April, nor the potentially inflationary rise in the minimum wage.

March's data needs another caveat: it is likely skewed lower by the fact that Easter, which increases airfares, is in late April this year but was right at the end of March 2024.

Both of these suggest inflation for April may come in higher - though falling oil prices could ease some inflationary pressure.

Inflation fell more than expected in March, official figures show.

The annual rate of inflation came in at 2.6% in the month, the Office for National Statistics said.

Economists had expected a rate of 2.7%.

At 7am we'll get the latest inflation data for March. 

Economists are expected to see it drop to 2.7% - just 0.7% above the Bank of England's 2% target. 

But what does all of that mean? Basically...

Inflation is the rate at which prices are rising.

It directly affects our overall cost of living and, if wages are not increasing at the same pace, the value of your money decreases.

It is affected by lots of different factors, including global conflicts - with the Ukraine war having a huge impact on food and gas prices. Some argue Brexit has also had a negative impact.

In the UK, inflation is measured monthly - comparing how much prices are going up with the same time a year previous.

The headline inflation figure, which you'll see a lot in the news, measures price rises across a range of products that we need in our daily lives.

The most commonly used inflation index is the Consumer Price Index - and the target for many Western governments is 2%.

One thing to note is that falling inflation doesn't mean prices are coming down - just that they're rising less quickly. You'd need a minus figure, or negative inflation, to see prices fall overall.

Why does inflation impact interest rates?

The Bank of England raises interest rates to try to slow spending and encourage saving - when this happens prices/inflation tend to come down.

When inflation falls, interest rates tend to.

Potential winners and losers from high inflation

Overall, a high and volatile rate of inflation is widely considered to be damaging for the economy - but there are some people who could benefit from it.

Workers with wage bargaining power (perhaps those who belong to strong trade unions) can come off better as they can protect their incomes by bidding for higher wages.

Producers could end up benefitting if their prices rise quicker than their costs.

People with stocks or property could also see the value of their assets rise if there is a sustained period of price inflation.

However, retired people on fixed incomes are likely to be worse off as inflation cuts the real value of their pensions and other savings.

The poorest members of the population will also feel the pinch more as costs of borrowing, food and domestic utilities are high. 

NS&I has relaunched the popular one-year saving bond and boosted rates across the board.

This will be a boon to those with large cash savings, given they can invest up to £1m rather than split the money across different providers to meet the £85,000 Financial Services Compensation Scheme limit.

The government-backed British Savings Bonds do, however, lag behind the market, with the current market-leading one-year fixed rate accounts paying around 4.65%, while the NS&I version pays 4.05%.

"Despite the lower interest rates, the bonds are likely to be hugely popular, particularly the one-year offering," says Laura Suter, director of personal finance at AJ Bell.

"When the one-year version of these bonds went on sale in late 2023 they sold out in five weeks, with more than a quarter of a million savers putting more than £10bn in the accounts. 

"At the time the accounts paid 6.2%, so the lower rate might mean we don't see such a clamour for the accounts."

Alongside the one-year fixed bond is a five-year relaunch, meaning that for the first time in more than 15 years, savers can buy four different fixed-rate income or growth bonds from NS&I.

What to consider before buying British Savings Bonds

Limits: Each person can save a minimum of £500 and up to £1m in the British Savings Bonds. 

No withdrawals: Unlike some previous versions of these bonds, you can't withdraw your money early.

Bond types: If you pick the "Income Bond" version, you'll get the interest paid out each month into your bank account, meaning you can spend it, which may be a better option for retirees.

If you don't need the income, you might be inclined to pick the "Growth" option, which means the interest is rolled up and added to the bond each year, and then you can only access it at the end of the fixed term. 

Tax: While Premium Bonds are tax-free, these bonds aren't, meaning once you breach the Personal Savings Allowance limit, you'll be taxed on the interest at your income tax rate.

Because the growth version of the bonds rolls up the interest until the bond matures, it means all that interest will fall into one tax year – potentially single-handedly breaching your allowance.

Safety: A big appeal of NS&I is that they are backed by the government, so they are seen as the safest place to keep your money. 

However, other banks and building societies are protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution. 

HyperJar customers will be charged £3 a month for failing to use their account from June. 

The "inactivity fee" will affect account holders who have not used their card for at least 12 months.

The prepaid card company will introduce the charge on 3 June, with money taken directly from HyperJar accounts. 

Launched in 2020, HyperJar is a digital budgeting system that allows users to divide their money into different "jars" for specific categories. 

Customers can also share expenses, split bills and earn cashback rewards with selected retailers. 

HyperJar also offers a kid's card that allows parents to control their children's spending. 

So, if you are not happy with the fee, here are your options: 

1) Avoid paying the charge

If you want to keep your account, but don't want to pay the fee, there are some simple ways to avoid it. 

You could make a transaction, send money to another HyperJar account, move your money from one savings "jar" to another or buy one of the cashback vouchers offered in the app. 

However, you need to make sure you continue using your account to avoid the fee in the future. 

2) Close your account

If you don't plan to use your HyperJar account, you could close it. 

You can do this online or in the app. 

If you go for this option, make sure you have a zero balance and you have used all your vouchers before doing so, otherwise you'll lose them. 

There are some alternatives on the market that offer similar features, so it's worth having a look around.

MoneySavingExpert suggests Starling Kite or NatWest Rooster Money if you are looking for a children's account. 

If you are looking for a prepaid card for yourself, it recommends Tesco Clubcard Pay+ or Ode.