Prepare for 3pc interest rates as inflation falls

THE Bank of England will slash interest rates to 3pc by the end of next year in a boost for millions of mortgage borrowers as inflation drops sharply, senior economists at KPMG have said.

Inflation is set to fall below the Bank’s 2pc target in the coming months as energy bills tumble.

The Bank’s governor, Andrew Bailey, and its Monetary Policy Committee risk harming the economy if they do not cut rates soon, according to Yael Selfin, the chief economist at KPMG in the UK.

She said: “If inflation is going to undershoot the target, it is going to be very difficult for the Bank to keep rates higher when it is really not necessary,”

The economy slipped into a recession at the end of last year, and Ms Selfin said the Bank risks over-tightening by keeping rates at 5.25pc instead of loosening policy.

Last week, Mr Bailey said rate cuts are “on the way” as inflation finally comes under control.

KPMG expects the economy to recover from the recession only slowly, with growth of 0.3pc this year and 0.9pc in 2025.

The analysts expect GDP to struggle with a trend rate of growth of around 1pc this decade.

Ms Selfin said a fall in migration will keep growth slow, as the economy is used to high levels of arrivals from abroad, while weak investment and poor productivity growth will also hamper the long-term outlook.

Business investment is predicted to fall by 0.1pc this year, as bosses worry about the future.

“Demand remains the main source of concern for many businesses, as they put hiring decisions on hold and reconsider investment plans,” Ms Selfin said.

“The upcoming general elections, both at home and among the UK’S main trading partners, compound the uncertainty surrounding future tax and trade policies within an already fragile geopolitical landscape.”

Separate data from the job search engine Adzuna suggest that the job market is showing signs of recovery.

The number of vacancies hit 866,242 in February, down just 0.14pc on January’s levels and a much smaller drop than in previous months.

Adzuna said the market appears to be turning a corner after a difficult start to the year. Graduate roles were also up 5.3pc on January’s figures.

‘Demand remains the main source of concern for businesses as they put hiring decisions on hold’