Financial markets may be overestimating the outlook for UK interest rates, with inflation potentially returning to 2% by the end of 2027, according to Darren Winder of Lazarus Economics and Strategy.
Winder challenged expectations that interest rates could approach 5% by the end of next year, arguing that underlying inflationary pressures were weakening despite increases in the headline inflation rate.
Addressing delegates at the Brightstar Specialist Lending Expo on 7 October, he suggested that changes in energy prices could make a significant contribution to reducing inflation during 2027.
His forecast assumes oil prices fall from around $100 towards $80 while gas prices remain broadly unchanged. Under those conditions, the annual comparison with previous energy prices could help bring inflation back towards the Bank of England’s 2% target.
Winder also predicted that the government would take steps to prevent a sharp increase in the energy price cap in January.
Without intervention, he warned, the Bank of England could be faced with inflation approaching 4%, potentially influencing financial market expectations for borrowing costs.
He said: “That’s the main prediction from today – that I come back here in 12 months’ time and we’re on track for 2% inflation.”
He added: “If we’re on track for 2% inflation in 12 months’ time, interest rates will be lower than they are today.”
Winder was particularly sceptical about the interest rate trajectory implied by financial markets.
He said: “The market currently thinks interest rates are going to be nearly 5% by the end of 2027. I think it’s just for the birds.”
WAGE GROWTH AND HOUSEHOLD SPENDING
Winder argued that developments in wages and productivity supported a less pessimistic interpretation of domestic inflation.
He pointed to private-sector wage growth of approximately 3% and productivity growth of 1%, suggesting that the resulting increase in unit labour costs of around 2% was consistent with the Bank of England’s inflation target.
He said: “Underlying inflationary pressures have clearly been easing, even though headline inflation is going up.”
Winder also offered a more positive assessment of the wider economy, estimating that annual growth had increased from around 0.75% to 1.5% over the preceding 12 months.
However, he suggested that a further acceleration towards 2% growth would depend partly on households reducing the proportion of their income held in savings.
He estimated that households were currently saving approximately 9% to 10% of their take-home income, with each percentage point reduction in the saving ratio potentially generating another £20 billion in consumer expenditure.
Lower interest rates could therefore help stimulate spending by making saving less attractive, he argued.
Winder said: “To me, the argument for getting interest rates down is to discourage saving more than it is to encourage borrowing.”
His assessment points to the potential for lower borrowing costs alongside an improvement in consumer spending, although the inflation outlook remains dependent on energy prices and other economic developments.
