Figures released for August have seen inflation drop from 1.9 per cent in July to 1.8 per cent in August – below the Bank of England target of 2 per cent.
Following five interest rate rises since August 2005, mortgage rates and indeed borrowers’ financial stability has taken a battering in the Monetary Policy Committee’s attempts to curb inflation back under their 2 per cent target.
Stuart Law, chief executive of Assetz PLC, believes the base rate hikes have been overdone:
“The inflation figure, now even further below target, down from 1.9% in August to 1.8% this month, offers a clear indication that Mervyn King and the Bank of England have over-reacted to short term inflationary pressures during the latter part of last year and into 2007.
“We saw the CPI drop dramatically last month, falling even lower this month, well under the bank’s 2% target. For inflation to have previously gone so far above target, to 3.1% and then fall back so rapidly below 2%, suggests either the Bank have not previously set the correct rates or, it is trying to manage short-term inflation through short-term base rate adjustments.
“The Bank of England will have to act to regain control and defend the economy in the face of reducing inflationary threats and rising credit costs.
“As a result of today’s figures and also the credit crunch, causing loan rates to rise independently of base rates, I predict base rates will fall before the end of the year. In the mean time, while banks are charging greater margins on credit to poor credit risk clients, better quality borrowers should benefit.”
