UK annual inflation has declined from 4 per cent to 3.2 per cent in Q1 2024, leading to adjusted market expectations regarding interest rate cuts. Initially, markets expected up to six rate cuts but have revised this to just two 25-basis-point cuts for the year. This adjustment is partly due to enduring higher interest rates in the US and slightly higher-than-expected UK price growth in March, where CPI rose by 0.1 percentage points more than anticipated.

The primary contributors to UK inflation currently are service costs, with food and non-energy inflation slowing down and energy prices providing some relief by pulling inflation down. Future projections for food and energy look stable with an anticipation of core inflation staying around 2 per cent over the next year, potentially dipping below target subsequently. There’s an expected further decline in services inflation and other factors, suggesting CPI inflation might fall below 1 per cent later in the year.

In the US, the Federal Reserve has decided to maintain its key interest rate, impacting various loan rates in the UK. With the Fed’s rates at a two-decade high, UK consumers face higher mortgage, credit card, auto loan, and business loan rates. The average mortgage rate in the US currently exceeds 7%, making renting more cost-effective than buying in major metro areas.

In a related UK development, Santander has increased its mortgage interest rates for the second time in four days as part of a broader trend of rising fixed-rate prices. This follows an industry pattern with other major lenders such as Nationwide and NatWest also raising their rates. Despite forecasts suggesting an impending rate cut, the Bank of England has maintained a higher rate of 5.25%, influencing lenders’ rate adjustments.

With inflation still above target in both the UK and US, adjustments in fiscal policies and rate settings remain focal points for both economies. The Bank of England and the Federal Reserve continue to navigate these complex inflationary landscapes, impacting consumers and housing markets significantly.