UK inflation fell last month despite most analysts expecting the rate to remain unchanged. The rate of Consumer Prices Index inflation fell from 2.6 percent in November to 2.5 percent in December, the Office for National Statistics has said.
Despite the drop, December’s headline figure still remains above the Bank of England’s 2 percent target, which has raised concern for economists and policymakers amid the stagnant economic growth.
Chancellor of the Exchequer Rachel Reeves said she will “fight every day” to improve people’s living standards. “There is still work to be done to help families across the country with the cost of living. I will fight every day to deliver that growth and improve living standards in every part of the UK,” she said.
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Former Bank of England policymaker Michael Saunders said Downing Street will be breathing a “sigh of relief” after the surprise dip in December inflation. The latest figures come amongst a period of turbulence in the UK financial markets, with the value of the pound dropping sharply and the cost of borrowing rising to decade-high levels over the last week.
A drop in inflation can prompt mortgage rates to fall because experts believe that the Bank of England will then bring the base interest rate down. Experts have now weighed in on what the latest drop in UK inflation means for interest rates and mortgages.
The Bank of England puts interest rates up and down to try to control inflation
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, says: “While the better-than-expected figure opens the door for further interest rate cuts from the Bank of England, the drop in the headline rate is only expected to be temporary with inflation edging up again in the coming months.
“While the latest inflation data appears positive for consumers, three years of rapid price rises have left their mark on household budgets and many are still trying to balance the books as their finances slowly recover from the high borrowing and living costs seen at the height of the cost-of-living squeeze. They will now be looking to the BoE for action on rates to ease borrowing costs further for those with mortgages and debts.
“Homeowners and first-time buyers may be buoyed by the latest inflation reading, as it raises the prospect of more rate cuts. However, the headline interest rate remains firmly above the BoE’s target of 2 percent and is expected to tick up from here, meaning there are no guarantees for borrowers.
“The average cost of a new fixed-rate mortgage has been volatile since the Budget, with some lenders repricing their products to reflect shifting interest rate expectations. With inflation potentially edging up further in the coming months, this would only prolong the pain for borrowers hoping for some respite from sky-high payments.
“Buyers and sellers will now be on tenterhooks to see when the next interest rate cut might materialise. For now, borrowing costs remain relatively high and with the mortgage market mired by uncertainty, first-time buyers and existing homeowners looking to secure a new deal soon may be feeling on edge.”
Graphic showing the UK inflation rate over time -Credit:PA Graphics
Alice continued: “Those looking to secure a new mortgage or refinance an existing product would be wise to secure the services of an independent mortgage broker. With the gap between the average rates for two and five-year fixed rates narrowing*, and so much uncertainty about future interest rate cuts, choosing whether to lock in for a shorter or longer period and whether to opt for a fixed or tracker product will require careful consideration.
“Any borrowers still fortunate enough to have cheap fixed-rate loans, secured before the BoE began its tightening cycle more than three years ago, must brace for a jump in mortgage costs when they eventually remortgage.”
Meanwhile, Rachael Hunnisett, director at April Mortgages, commented: “Inflation coming down slightly in December may offer a degree of hope to borrowers but it does not dispel the huge unpredictability in the economy at present.
“The current uncertainty in the both the mortgage and property markets is set to remain which will no doubt be reflected in more potential volatility in interest rates for borrowers.
“The key takeaway from this data is that mortgage holders seeking greater financial security and peace of mind in today’s increasingly complex market should look beyond short-term deals that leave them nervously counting on future good news. Opting for a longer-term solution can help shield against the risk of even higher monthly costs.”
Experts have mixed views on how the drop in inflation will affect interest rates -Credit:Getty
Peter Stimson, Head of Product at MPowered Mortgages, warned ‘things could get worse before they get better’. He said: “Even with today’s progress on CPI, the Bank is walking a tight rope between the need to leave interest rates high to tame inflation and the desire to cut them to kickstart the flatlining economy.
“The mortgage markets have now priced in just two cuts to the Base Rate in 2025, with at least one likely to be at the end of the year For now, there are bigger fish to fry. Swap rates, the main driver of fixed rate mortgage pricing, have been rising in recent weeks.
“The reasons are complex and varied, but the worry about persistent inflation is a key driver – how the markets react to this morning’s news will be key. For now, while today’s inflation figures are welcome, on the mortgage interest rate front things could still get worse before they get better.”
With a more positive outlook, Jack Tutton, Director at SJ Mortgages, commented: “This small drop in inflation may prove significant and could start turning the tide. We have seen gilt and swap rates rise significantly over the past week, so today’s data will help settle the markets.
“Despite the market increases we have seen, lenders largely haven’t increased their mortgage rates in line with these. The hope will be, following today’s figures, that the markets stabilise and lenders will not need to pass the increases onto mortgage holders.”