Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “This is a big moment for the UK economy as inflation meets the Bank of England 2% target for the first time since 2021. The US and the Eurozone are still sat above target, making the UK a positive outlier and adding to speculation that the Bank of England could move to cut interest rates later in the year. All in all, now seems a good time to take stock and consider how the changing economic environment could influence your finances and approach to saving.
“Regardless of the economic environment, it’s recommended you have six months of easy-access cash based ‘rainy day’ savings, in case of illness, redundancy and those one-off extra costs that come up in life. If you’re looking to open a new account, interest rates aren’t as good as they were a few months ago but you can still get a decent deal if you shop around. It’s worth considering an easy-access ISA as interest payments are tax free.
“A lower inflation, potentially lower interest rate environment brings mixed news for cash-based savers. On the plus side price rises won’t be eating into the value of your savings to the same extent, but likewise you won’t be getting the same returns either. Ultimately, gains are likely to be marginal – at 3% interest and 2% inflation, for example, savings of £10,000 will be worth £10,189 in real terms after two years. If you’ve got the six months savings cover, then you could consider investing, perhaps into a stocks and shares ISA. This offers a greater chance of substantial returns, but there’s always the chance of losing money too.
“If you’re able to take a long-term view, consider saving into a Lifetime ISA (LISA), which can be particularly beneficial if you’re saving up for a first property, or a pension, which offers
both the benefits of investing, tax efficiency and a potential build-up of compound investment growth over a number of years.”
Lily Megson, Policy Director at My Pension Expert, said: “With just 15 days until the election, the government will no doubt claim the slowdown in inflation as a victory. But it's too little, too late for Rishi Sunak. The return to the Bank of England’s 2% target is a positive development, but it cannot erase the prolonged financial hardship faced by many households.
“Following last month’s dip in inflation, the Prime Minister claimed it was proof that the plan is working. But the government must recognise that today’s figures do not signal the end of people's fight for financial security. Pension poverty, for example, is on the rise. The cost-of-living crisis has made it incredibly challenging for individuals to contribute to their pension pots, leading many towards a difficult, delayed or unattainable retirement.
“The next government will have its work cut out. With inflation back at manageable levels, now is the time to help people get back on the path to recovery. Prioritising financial education and ensuring accessible advice for all will be essential. This approach will not only empower people to take control of their financial futures, but also ensures that everyone benefits from any economic recovery over the coming months.”
James Lynch, fixed income investment manager at Aegon Asset Management: "At the start of 2023 with inflation running over 10% it seemed like a gargantuan task to return inflation back to 2% target. Back then if the BoE was told it would get to the magical 2% number one day before its MPC meeting with interest rates at 5.25%, it would have been very certain it would cutting rates on the 20th June 2024.
"However, that now seems very unlikely. Indeed, even a move at the following meeting in August hangs in the balance. This is because the underlying mix of the inflation basket does not give it much comfort that this return to 2% target is sustainable. Goods inflation is in deflation at -1.3%% while services is 5.7%. The BoE has stated it believes services is a better gauge of underlying inflation and 5.7% is 0.4% above its forecast for this print.
"While it is welcome news that inflation has been tamed, we might have to wait a little longer for the BoE to be comfortable to reduce interest rates accordingly."
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