The chances of the Bank of England cutting interest rates in December have diminished after inflation rose above 2% in October.
Data this morning showed that the consumer price index (CPI), which measures how much the price of goods and services has changed in a year, rose to 2.3% in the 12 months to October – up from 1.7% in September.
Interest rates are strongly influenced by inflation. When interest rates fell below the Bank of England’s target rate of 2% in September, the rate was cut 0.25% interest rate reduction followed shortly afterwards.
But now that inflation has risen above target, another cut in the base rate seems less likely.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partnersthe online investment platform, said: “Homeowners and first-time buyers are likely to be discouraged by the latest inflation figures as they reduce the likelihood of a third rate cut this year.
“The average cost of a new fixed-rate mortgage has crept up since the Budget, as lenders price their products to reflect expectations that interest rates can stay higher for longer.
“With the latest inflation figures confirming that inflation has not only risen back above the BoE’s 2% target, but has also come in higher than expected, this means mortgage borrowers could face more pain as more lenders cut interest rates to above would adjust.”
Will mortgage prices continue to rise?
Borrowers to tracker Variable rate mortgages will be most affected by this news. Another interest rate cut in December would have been an early Christmas gift, reducing repayments at a time when savings are needed most.
But it’s not good news for borrowers looking for fixed interest rates – whether they’re exiting an existing deal or buying a property – as experts think more mortgage rate hikes could happen.
David Hollingworth, Deputy Director at L&C Mortgages explained: “Fixed interest rates are already on the move and have risen in recent weeks, often by 0.25% of a percentage point or more.
“That has driven up fixed mortgage rates, and all rates for major lenders in Britain are now back above 4%, with only Allied Irish Bank sticking to anything below that.
“These increases are due to less optimistic interest rate forecasts and today’s figures will not change that.
“While rates are still expected to fall, the growing expectation is that rates will fall more slowly and not as far as previously expected.
“Given that the current inflation rate is at the higher end of expectations, that picture will only harden, which could impact lenders’ funding costs.”
Hollingworth advises borrowers looking for deals to ‘keep their guard up’ as mortgage lenders adjust their prices daily.
“There certainly isn’t the luxury of being able to wait to do a deal and expect it to still be there in a week or so as rates continue to come and go quickly,” he said.
“It would not be a surprise if this trend continues and fixed interest rates increase as a result of today’s news.”