Loan cost may be kept down as inflation tipped to drop

The cost of an unsecured loan and the risk of repossession due to mortgage costs could be kept down due to a fall in inflation making it possible for the Bank of England to keep the base rate low.

Such a situation may arise if the projections of the Office for Budget Responsibility (OBR) mentioned by chancellor George Osborne in his Budget speech are correct.

The OBR said the Consumer Prices Index rate will remain between four and five per cent this year, but drop back to 2.5 per cent in 2012 and to its target rate of two per cent in 2013.

Commenting on the prediction, editor of InvestmentandBusinessNews.co.uk Michael Baxter said: “I think that is probably right. I think that inflation is being caused by one-offs at the moment.”

He noted the VAT hike is one of these and will have no impact from January 2012, while oil prices cannot go on rising and should fall in the next year as people will simply not be able to afford the price.

Such a situation could ease the pressure on the Bank of England’s Monetary Policy Committee (MPC) to raise the base rate from its record low level of 0.5 per cent, where it has been set since March 2009.

The minutes of the latest MPC meeting were published yesterday (March 23rd) and revealed there was no increase in support for a rate rise compared to February, with all nine members voting exactly the same way as they did the previous month.

Six of the nine voted to keep the base rate at 0.5 per cent.

By Amy White