The latest inflation figures are announced tomorrow and the Bank of England makes its next base rate decision on Thursday.
The Office for Budget Responsibility says inflation is likely to fall to 2% in the second quarter of this year - so a significant move in that survey is expected. But the Bank of England says that after this, inflation is likely to rise again for the rest of the year.
Most market analysts expect the Bank to cut rates in June and to end the year at 4.2%.
Susannah Streeter, head of money and markets at business consultancy Hargreaves Lansdown, says "we’re on a downwards escalator, with another drop in inflation expected, and an accelerated move lower forecast for the months to come. But Bank of England policymakers are still set to hold their position, and grip on to higher interest rates. They will want more evidence that wage growth will ramp down further before they budge and bring in a rate cut. The Office of Budget Responsibility, the government’s independent forecaster, reckons inflation will hit the Bank’s 2% target this quarter. However, this could be a short-lived dip, and prices could take off again. Potentially inflationary pressures ahead include the ongoing fight for talent, higher shipping costs due to Red Sea disruption, and the increase in the minimum wage and business rates.
Increasing consumer and company optimism could see spending ramp up, potentially putting upwards pressure on prices. So, the name of the game will still be caution in the months ahead.”
Analysts says that although a June cut is being pencilled in, a reduction in rates in August may be more likely when the Bank also publishes the summer monetary policy report.
The reticence over reducing rates sooner, given lacklustre growth, means that inflation could dip below the government’s 2% target in the near future.
What might this mean for mortgages, a key factor in the health of lettings and sales markets?
Rates climbed throughout February, as banks priced in the risk of Bank of England rates staying higher for longer, and they’ve continued to rise throughout March.
As the Bank of England has warned that the next inflation figure may be a blip - and temporarily low - lenders may not react in a hurry.
Hargreaves Lansdown warns that by the end of this year, one in four mortgage holders are expected to be at risk of falling into arrears – because they spend so much of their monthly income on keeping a roof over their head.
Will interest rates go up?
Currently, experts expect the base rate to remain at the same level of 5.25%. In February's meeting, only one member of the MPC voted for rates to be cut while two voted in favour of a rise.
Robert Wood, chief UK economist at Pantheon Macroeconomics said "the MPC focuses on the ‘tightness of labour market conditions, wage growth and services price inflation’ to judge ‘how long Bank Rate should be maintained at its current level’. We think the data have not surprised enough to trigger a change in guidance at the MPC’s meeting on March 21. The Bank will continue signalling rate cuts, but with little new as regards timing. We expect the same 1-6-2 (cut-hold-hike) vote as last month. Overall, the data since the MPC’s last meeting confirm – rather than challenge – its forecasts.
That is all that is needed for the BoE to remain on course for summer rate cuts. In February, the MPC forecast inflation would fall to 1.4% at the two-year forecast horizon if it kept interest rates restrictive at 5.25%. Policymakers just need the confidence to trust those forecasts.”
The Bank's decision will also be influenced by new Consumer Price Index inflation figures which are set to be released one day prior to their meeting.