UK inflation could return to the Bank of England’s 2% target by the end of 2027, with interest rates falling from current levels, according to the head of Lazarus Economics and Strategy.
Darren Winder told delegates at the Brightstar Specialist Lending Expo last week that easing energy prices could drive inflation lower over the course of next year.
Winder said that if oil prices fall from around $100 towards $80 during 2027, while gas prices remain around current levels, base effects should bring inflation back to the Bank of England’s 2% target by the end of the year.
Winder also predicted that the government would intervene to limit a sharp rise in the energy price cap in January. He warned that without intervention, the Bank of England could forecast inflation approaching 4%, potentially pushing up market expectations for interest rates.
Winder challenged financial market expectations for interest rates, which he said currently pointed to rates being close to 5% by the end of 2027.
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.”
Winder argued that much of the movement in inflation has been driven by volatile energy prices rather than underlying domestic inflationary pressures. He also pointed to private-sector wage growth of around 3% and productivity growth of 1%, arguing that this implied unit labour costs were rising by approximately 2%, consistent with the Bank of England's inflation target.
He also struck a positive note on the wider UK economy, saying the annual growth rate had doubled over the past 12 months from around 0.75% to 1.5%.
However, Winder said stronger household spending would be key to pushing economic growth higher, with UK households currently saving around 9% to 10% of their take-home income.
He estimated that every one percentage point fall in the household saving ratio could generate an additional £20bn of consumer spending.
Winder argued that this was one of the strongest reasons for bringing interest rates down once inflation allows.
He said: “To me, the argument for getting interest rates down is to discourage saving more than it is to encourage borrowing.”
Overall, Winder said the economy was performing more strongly than much of the prevailing commentary suggested.
