Inflation has fallen to 2.5%, raising the prospect of a rate cut in February.
It came as a surprise this morning when the consumer price index for November was 0.1% lower than the month before.
This means that the price of goods and services increased by 2.5% over the year to November 2024, compared to 2.6% per year to October 2024.
No one expected inflation to be lower, so the news will be welcomed by consumers.
And it also offers greater hope that the Bank of England (BoE) will cut rates when its decision-makers, the Monetary Policy Committee (MPC), meet on February 6.
David Hollingworth, Deputy Director at L&C Mortgages said: “The surprise fall in inflation is positive news for borrowers who will have been unsettled by the recent turmoil in government bond markets and what this could mean for mortgage rates.
“While there could still be increases in the coming months, the decline in inflation will strengthen hopes that the Monetary Policy Committee will cut the key interest rate in February.”
He explained that three of the nine members of the MPC voted in favor of a cut in December The base interest rate was maintained at 4.75%. This shows that there was some willingness to reduce rates.
But Hollingworth explained that the market – and mortgage lenders in particular – had expected no increase in February.
“That,” he explained, “has led to fixed interest rates rising before the end of the year, something that will continue into the new year.
“This will have added an unwanted amount of uncertainty for borrowers who had hoped for further improvement in mortgage rates. The expectation is that the base interest rate will continue to fall, but the question is whether that decline will now be more superficial and gradual.”
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partnersthe online investment platform, said inflation is still well above the BoE’s target of 2% and inflation is expected to rise from here, meaning there are no guarantees for borrowers.
She added: “The average cost of a new fixed rate mortgage has been volatile since the Budget, with some lenders adjusting their products to reflect changing interest rate expectations.
“With inflation likely to rise further in the coming months, this would only prolong the pain for borrowers hoping for some reprieve from sky-high payments.
“Buyers and sellers will now remain on edge to see when the next rate cut could occur.
“For now, borrowing costs remain relatively high and with the mortgage market plagued by uncertainty, first-time buyers and existing homeowners looking to close a new deal soon may feel tense.
Need a mortgage or refinancing in 2025? What is the advice?
Anyone considering taking out a mortgage – whether to purchase a home or to refinance as your current agreement expires – is advised to speak to a broker or adviser.
Haine said with the gap between them average two- and five-year interest rates fallAccording to Moneyfacts data and the high uncertainty surrounding interest rate cuts, it would be helpful to have a professional help you find the best option for your finances.
“The choice of whether to commit for a shorter or longer period and whether to opt for a fixed product or a tracker product will require careful consideration,” Haine added.
Hollingworth suggested that borrowers coming to the end of their deals later this year should start looking at their options now. He said: “Today’s figures will help maintain some stability in mortgage rates, but borrowers coming to the end of their current deal will likely still want to secure a new rate a few months in advance.
“That will allow them to avoid further increases if fixed rates continue to rise, but still give them room to assess whether things are turning for the better.”