Sarah Coles, head of personal finance, Hargreaves Lansdown provides some insight into what we might expect to see in 2024.
“Inflation is set to fall during the year, but not as far or as fast as you may suspect. The halving of inflation since the peak owes a huge amount to falling international energy prices. The gap between the current 4.6% rate and the Bank of England’s target of 2% is likely to prove tougher to close, because the Bank of England will need to contend with domestically-fuelled inflation through things like higher wages, which is a tougher nut to crack. As a result, the Office for Budget Responsibility thinks inflation will average 3.6% in 2024 – which isn’t a massive drop from where we are now, and that it will only get back to the 2% target in 2025. It’s why interest rates are likely to have to stay higher for longer.
To keep this extra inflation under control, the Bank of England is going to need to keep an iron grip on interest rates. The OBR expects that even by the end of its forecast in 2028/29, rates will still be at 4%. The jury is out on when the first rate cut might hit - with a spread of forecasts between the spring and winter next year. On balance, cuts are unlikely until at least the summer. Even when the Bank of England does cut rates, we’re expecting them to come at a glacial pace, because the Bank will be hyper-focused on inflation risks.
The prospect of interest rate cuts might have persuaded remortgagers there was good news on the way, but things aren’t as rosy as they might hope. Mortgage rates have been falling gradually as the market priced fewer rate rises into fixed rate deals. In 2024, they’ll keep drifting south, as lenders begin to price in rate cuts. However, given that the Bank of England is in no hurry to cut interest rates quickly, these will be very gradual movements. Given that so many people are switching from a rate below 2%, it means that anyone remortgaging in 2024 is still likely to face a painful squeeze on their finances.
It’s going to be another tough year for the property market. We can expect some positivity in the early spring, as the lower mortgage rates we’ve seen recently start to filter into the figures, but it’s highly unlikely to be a turning point. Inflation, higher interest rates and weakness in the economy more broadly are all expected to keep a lid on house prices. As a result, the Office for Budget Responsibility expects property sales to fall another 6.9% in the coming year – and prices to drop 4.7%. Mortgage rates should eventually reach a tipping point, where buyers come back to the market, mortgage approvals pick up, sales rise and prices are more robust. However, this might not come until 2025.
Savings rates peaked a while ago, and have been falling gradually for weeks, as the market digests the fact that we’re unlikely to see any more Bank of England rate rises in this cycle. 2024 is likely to bring more of the same, as it starts to reflect an expectation that interest rates will fall. We’re unlikely to see a huge watershed moment when savings rates are cut. Instead, we expect to see them slowly drift south throughout the year. It means shopping around will be more important than ever as rates fall. If your cash has been sitting with a high street giant, it’s well worth considering a switch to a smaller or newer bank, or a cash savings platform, where your savings can work harder.
Falling inflation and rising wages sadly won’t mean the cost-of-living crisis is over. Wage rises still have an awfully long way to go to make up for the spending power we’ve lost over the past couple of years, and they have slowed significantly in recent months. In the most recent figures, if you annualised quarter-on-quarter growth, wages would be up just 4.2% - behind inflation again. The OBR expects living standards in the coming financial year to be 3.5% lower than their pre-pandemic level.
In January Class 1 NICs will be cut by 2 percentage points, from 12% to 10%, saving on average £304 for basic rate taxpayers, £647 for higher rate taxpayers, and £707 for additional rate taxpayers. This will unwind the damage done by fiscal drag to our income tax bills since thresholds were frozen.
In addition, we could see the much-trailed income tax cut announced in the Spring Budget. It’s certainly an approach that previous Chancellors from Nigel Lawson to Ken Clarke haven’t been afraid to use in the run up to an election. However, we can’t be sure if it would kick in before 2025.
Assuming there’s no immediate income tax cut, an awful lot of people will still pay more tax. The OBR says the tax burden will rise every year to the end of the forecast in April 2029 – hitting 37.7% of GDP – the biggest burden since World War II. It’s not just existing taxpayers paying more, by the end of the forecast there will be 4 million more people paying income tax, 3 million more paying the higher rate and 400,000 more paying the additional rate.“
