Interest rate cut is good news - but there's one group who won't benefit |
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Good economic news is rare this Christmas season, so the fall in the Consumer Prices Index – the rate of inflation as judged by the price of various household essentials – from 3.6 per cent to 3.2 per cent deserves a welcome.
It makes it a near certainty that the Bank of England will cut its interest rate from 4 per cent to 3.75 per cent when its monetary policy committee meets today. The decline in inflation was greater than the markets had expected, so the FTSE100 share index at one stage shot up by more than 150 points, close to its all-time high. The cost of government borrowing fell sharply too.
There is, as so often happens in economics, a catch – or rather, in this case, two catches.
The first is that the reasons for this sharp fall in inflation are temporary, such as early Black Friday discounting by retailers, a drop in airfares, the fact that tobacco duty was increased a month later this year than last, and so on. Underlying inflation in the huge services sector rose to 4.1 per cent, up from 4 per cent in October, and that is the indicator most closely watched by the Bank of England.
So expect inflation to go back up again in December and into the New Year, and if that does indeed happen, the scope for further cuts in interest rates will be very limited indeed.
While there may be some further trimming back of the interest cost of a mortgage next year, the decline is not likely to be substantial. Since inflation is still running well above the target rate of 2 per cent, it is........