A sharper-than-expected fall in inflation in January has raised expectations of both a cut in the base rate and lower mortgage costs after price pressures eased more quickly than forecast.
The Consumer Prices Index dropped from 3.4% in December to 3% in January, according to the Office for National Statistics. It is the lowest annual level since March last year, when inflation stood at 2.6%, and puts it back on the downward path that had dominated much of 2025.
The ONS said easing transport and food costs are the primary drivers of the slowdown. Air fares unwound from their December seasonal spike, petrol prices fell by 3.1p per litre between December and January, and food inflation slowed from 4.5% to 3.6%, its lowest level in nine months.
Downward pressure
Economists say the breadth of the decline from across the inflationary spectrum strengthens the case for lower rates. Yael Selfin, Chief Economist at KPMG UK, told the Telegraph:
“Today’s inflation data will likely prompt the Bank of England to lower interest rates next month. The MPC will welcome the broad-based fall in inflation, with both headline and underlying measures of inflation easing.”
Markets moved quickly in response. Traders are now betting there is roughly an 84% chance the Bank of England will reduce the base rate from 3.75% to 3.5% at its next meeting on 19 March, and interest rate futures markets are beginning to price in further easing later in the year.
Mortgage costs will soon follow
That will soon begin feeding into mortgage costs via swap rates. Those are the rates at which banks borrow money to fund mortgage lending and reflect expectations of the future direction of the base rate. When markets price in rate cuts, swap rates typically fall and cheaper fixed-rate deals then follow.
Leading fixed rates have held broadly steady in recent weeks, but lenders have intensified competition in the middle of the market as swap rate expectations have softened. Hina Bhudia, Partner at Knight Frank Finance, said weaker inflation data raises the likelihood of two cuts this year and could allow fixed mortgage pricing to ease incrementally in the coming months, with any reductions also having a “meaningful impact on sentiment” in the wider housing market.
Longer term outlook
Not all economists expect the Monetary Policy Committee to make an immediate move, though. Ellie Henderson of Investec warned:
“Inflation at 3% is still some way above the Bank of England’s 2% target, meaning that caution should still prevail when it comes to loosening policy further.”
Others, however, argue the Bank risks reacting too slowly. Kallum Pickering, Chief Economist at Peel Hunt, said:
“The clear risk now is that the bank has fallen behind the curve and will need to play catch-up.”
Jonathan Samuels, CEO of Octane Capital, described the latest data as “a welcome step back in price pressures” but said inflation remains above target and underlying risks persist, adding that flexibility remains essential until a sustained return to 2% inflation is visible.
And according to John Phillips, CEO of Just Mortgages and Spicerhaart, expectations of lower borrowing costs are already supporting buyer registrations and mortgage enquiries, helped by high product choice and competitive lending conditions.
