UK inflation

Will fall in UK inflation bring interest rates down sooner?

UK inflation has cooled unexpectedly to 3.9% in the latest November figures, bringing hope that the economy could begin to recover faster in the coming year.

The rate of UK inflation came down again in the Office for National Statistics’ latest announcement, from 4.6% in October to 3.9% in November, thanks largely to falling petrol prices. Rises in prices for food and household goods have also slowed down, reducing financial pressures for many households.

The typical UK energy bill is also expected to drop by £1,660 by April thanks to a predicted 14% fall in the energy price cap, although the benefit of this for individuals could be offset by the government removing its support for bills.

Looking at how this might effect interest rates, the Bank of England has so far held its base rate at 5.25% three times in a row at Monetary Policy Commission meetings, the highest level it has been since December 2021. The Bank has kept rates high in order to continue to curb UK inflation.

Now that inflation has shown a succession of declines, though, many analysts expect this will put added pressure on the Bank of England to bring rates down sooner and more sharply in 2024.

UK inflation target edges closer

Commenting on the latest UK inflation announcement, Ranald Mitchell, director at independent broker Charwin Private Clients, believes the Bank of England could begin to ease interest rates as early as February 2024.

“The 2.0 per cent inflation target seems within touching distance now, and will surely put pressure on the Bank of England to ease up rates, possibly in February, at the first opportunity.

“Owner-occupier housing costs also seem to have peaked, with a slight drop. With mortgage lenders battling away in their pricing war, it may be that the savage increase in mortgage repayments for the circa 1.4m ultra-low fixed rates maturing in 2024 may be a lot softer than anticipated.”

Positive news for mortgages

Swap rates have fallen at a faster rate than the Bank’s interest rates, and this has already been reflected in the actions of lenders. Mortgage rates for both homeowners and landlords are continuing to fall, with products becoming more competitive and enticing, and this is forecast to continue as the economic outlook improves.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “The inflation news has pegged swap rates back further, with five-year swaps falling to 3.45 per cent, while two-year swaps are slightly higher at 4.11 per cent.

“The next move in base rate is almost certainly downwards; the question is how soon? Increasingly, speculation suggests May/June, which will come as welcome news for hard-pressed borrowers.

“In the meantime, lenders continue to reduce their mortgage rates, and will be keen to get 2024 off to a good start after a disappointing 2023. If mortgage rates continue to fall and borrower affordability continues to improve, we would expect transaction numbers to improve.”

A boost in housing activity

While the UK housing market has remained remarkably resilient over the past couple of years, with many industry experts pointing out that house price falls or slower rises are a sign of a natural correction after the hikes seen post-Covid, higher mortgage rates and UK inflation have slowed activity.

This has been more marked among those who are the most heavily mortgaged, including in more expensive parts of the UK, while more stability in pricing has been seen in parts of the north where borrowing amounts are lower on average.

As property industry analyst Anthony Codling pointed out, the latest UK inflation news – and the ongoing reduction in mortgage rates – will be a welcome boost for the property market.“This is good for the UK housing market. As CPI falls it is likely that, over time, mortgage rates will follow suit,” he said. “We expect that the news will re-ignite the debate about when Bank Rate will start to fall.
“Falling mortgage rates mean more people will be able to buy a home and activity in the housing market is likely to rise which is likely to underpin house prices, reducing the risk of house price falls in the new year.”

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