Boost for debtors: Interest charges tipped to fall to three per cent by the summer time to prop up battered financial system

Interest rates have been tipped to fall to 3 per cent by the summer as the Bank of England battles to prop up the ailing economy.

Just a day after it revealed unemployment has risen to a five-year high and youth unemployment stands at an 11-year high, the Office for National Statistics said inflation fell to 3 per cent in January.

That was down from 3.4 per cent in December and the lowest level for ten months – setting the scene for further interest rate cuts this year.

That would be a boost for millions of families hoping for cheaper mortgage deals.

However, inflation remains well above the 2 per cent target and has risen sharply under Labour as higher taxes, wages and energy bills push up prices.

It stood at 1.7 per cent the month before the Chancellor’s first tax-raising Budget.

Bank of England Governor Andrew Bailey 

Rachel Reeves insisted ‘cutting the cost of living is my number one priority’ and added: ‘Thanks to the choices we made at the Budget we are bringing inflation down.’

But shadow chancellor Sir Mel Stride said: ‘Inflation remains above target thanks to Labour’s choices. Families are still feeling the pinch because of Labour’s economic mismanagement.

‘This comes after the ONS confirmed unemployment has risen to a five-year high, with youth unemployment now above the European average, and GDP per capita falling.

‘Wes Streeting was right that Labour have no growth strategy.

‘Britain is not being governed – the economy is weaker and working people are paying the price.’

Analysts said that although inflation remains above target, the fall should be enough to persuade the Bank of England to cut interest rates as soon as next month given the dire state of the economy.

Central banks typically raise interest rates to tame inflation, and lower them when it is back under control.

Katharine Neiss, chief European economist at investment manager PGIM, said she now expects rate cuts in March, April and June – taking them to 3 per cent by the summer.

‘The UK economy is weak and requires lower rates,’ she said.

Kallum Pickering, chief economist at Peel Hunt, said the bleak jobs figures combined with the drop in inflation ‘strengthen the call for a March cut’.

With the Bank expecting inflation to return to the 2 per cent target this spring, Mr Pickering it may now have ‘fallen behind the curve and will need to play catch-up’ by cutting rates more aggressively than anticipated later this year.

Union leaders urged the Bank to crack on while business groups said the case for cuts was clear.

‘The Bank of England must now act,’ said TUC general secretary Paul Nowak. ‘From next month we need a series of quick-fire interest rate cuts.

‘That would put money back into people’s pockets, give businesses the confidence to invest and help Britain finally move on from a cost-of-living crisis that has dragged on for far too long.’

Anna Leach, chief economist at the Institute of Directors, added: ‘With the unemployment reaching 5.2 per cent – which is the highest since 2015 when you exclude the pandemic – the inflation number should help incline minds at the Bank of England towards a rate cut in March.’

Investors have been ramping up bets on an interest rate cut next month, with financial markets indicating there is now an 85 per cent chance of such a move.

Suren Thiru, economics director at the ICAEW accountancy trade body, said the inflation figures ‘make a spring interest rate cut look almost assured, though a lingering question among policymakers will be whether to pull the trigger in March or April as some may want slightly more evidence of easing inflation before reducing rates.’

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: ‘The only question left to answer is not ‘if’ but ‘when’ will interest rates be cut again. While March is by no means a certainty, the chances of a further rate cut next month have undoubtedly been bolstered.’