Inflation rose to 2.2% in July, raising questions about another short-term interest rate cut.
The consumer price index (CPI), which measures the increase in prices of goods and services during the year, fell to its target of 2% in May, where it remained in June. But the fact that interest rates rose 0.2% in July is a reminder that we are not out of the woods yet when it comes to cost-of-living pressures.
The Bank of England (BoE) is trying to reduce inflation by keeping interest rates high. The current increase in inflation therefore also raises doubts about whether we will see another interest rate cut next month.
In August the BoE lowered base rate by 0.25% reducing it from 5.25% to 5%. It was the first cut in four years and experts had predicted that another cut would follow soon.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said that while the “upturn” in inflation may be worrying for households, it is still significantly lower than the 11.1% seen in October 2022 was achieved. only just panicked.
“What will be disappointing,” she said, “is the prospect that the next rate cut may be delayed until later in the year.
“The stronger inflation figures are now above the Bank of England’s inflation target of 2%, causing complications for the central bank as it shifts to a lower interest rate environment.”
Haine added: “Homeowners and first-time buyers hoping for a second rate cut sooner or later may be discouraged by the latest inflation figures as they reduce the likelihood of a cut in September.
“It is reassuring that, while mortgage rates remain high, some major lenders have already made cuts, while home loans are rising below 4% – heralding better times ahead. This can provide the reassurance nervous buyers need to proceed with the choice of buying a first home or moving to a larger property.”
Will mortgage price cuts continue?
More lenders have emerged this week offering cheaper deals, with Nationwide announcing yesterday (Tuesday 13 August) that it was offering a rate of 3.83% on a five-year fixed rate for new customers moving and having equity of 40% or more to have.
With the rise in inflation reducing the chances of a base rate cut, lenders will now stop doing so mortgage price reductions?
David Hollingworth, associate director at L&C Mortgages, didn’t think so.
He explained: “Mortgage rates were already falling, but the Bank’s cut came earlier than many expected and has helped bring down costs for lenders.
“In a cutthroat market, interest rates have already fallen further, with a group of major lenders now offering five-year fixed rates below 4%, levels not seen since much earlier this year.
“That direction of travel is unlikely to be disrupted by the reaction to today’s news and the market will be well set for a rise.
“Instead, we are likely to see continued and frequent movements in mortgage rates as lenders continue to adapt and improve where they can.”
Reasons why a base rate cut could still go ahead in September
Meanwhile, others were unsure that today’s inflation figures would have too much of an impact on the BoE. The Consumer Price Index (CPI) measures the prices of many things and today’s increase was mainly driven by energy prices. Core inflation and services inflation both fell.
Michelle Lawson, director at Lawson Financial, was much more positive about today’s figures via Newspage Agency.
“Although inflation has risen overall, key indications show that overall the situation is cooling. This will be music in everyone’s wallet.
“Let’s hope the Bank of England’s ears are listening, as this could well indicate an additional rate cut in September if the next CPI data follows the same path. The tables appear to be turning: anyone looking to buy property should consider doing so sooner rather than later.”