Tamer inflation leads to speculation over interest rate cut and cheaper mortgages

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Inflation remained steady in January, according to new official figures which have defied gloomier expectations and sparked fresh speculation over cheaper mortgages and the Bank of England’s base interest rate.

The Office for National Statistics (ONS) announced on Wednesday that the rate of Consumer Prices Index (CPI) inflation – a measure of the costs that households face – was 4 per cent in January, the same as the month before, defying fears of a backwards slide to 4.2 per cent.

In the year to January, the category that fell the most was transport, with costs down 0.5 per cent, while alcohol and tobacco rose the most, by 12.2 per cent.

Food prices also fell slightly month-on-month for the first time since September 2021, dropping 0.4 per cent compared to December – but they remained 25 per cent higher than in January 2022.

The tamer-than-expected inflation figures have intensified speculation over the possible timing of a cut to Threadneedle Street’s base rate, which at 5.25 per cent is at its highest level since 2008. That would help home buyers but at a cost to savers.

There was disagreement among economists about what January’s figures meant for rates, with Pantheon Macroeconomics arguing that the figures meant it was more likely the UK would see a rate cut by the summer.

However Investec said that the data released on Wednesday has not changed its expectations.

This uncertainty was echoed by mortgage brokers, many of whom believed the Bank of England was more likely to be swayed by developments across the Atlantic, after the United States saw inflation fall by less than anticipated on Tuesday to remain above 3 per cent.

New quarterly data from the Office for National Statistics showing slightly slower wage growth than expected, up 6.2 per cent in the year to December, and also saw investors rein in their bets on interest rate cuts this year.

While the UK inflation data is “certainly unexpected and positive news”, Craig Fish, director at Lodestone Mortgages & Protection said that if wages and employment data “look hotter than expected then an early rate cut is off the cards”.

The eyes of the Monetary Policy Committee, which sets interest rates at the Bank of England “seem to be set on the Fed in the US, as it’s likely that when they make their first move (which could be a while) its likely that the UK will too,” he said.

Lewis Shaw, of Shaw Financial Services agreed that, with US inflation rising, the likelihood of any base rate cut will be pushed back further. He said: “Furthermore, the hotter-than-expected US inflation caused gilt yields to increase yesterday, meaning any further mortgage rate reductions will be paused, and we could see many lenders begin to reprice upwards.”

However others harboured hopes that the inflation figures could ease recent volatility in the mortage market.

Nationwide, the country’s biggest building society, revealed its mortgage rates would rise by up to 0.25 percentage points on Tuesday. It came after lenders Halifax and TSB said they were also raising rates on some of their products.

Mortgage rates are closely tied to swap rates, which is effectively the rate the lenders pay a financial institution for funding, and that is affected by the Bank of England’s base interest rate and inflation.

Experts had been predicting that inflation would go up marginally from the annual 4 per cent recorded last month, causing some lenders to “safeguard” themselves by hiking their own rates early, Ken James, director at Contractor Mortgage Services, told The Independent.

But with the figures instead showing the “welcome news” that inflation remained steady in January, Imran Hussain, director at Harmony Financial Services said this would hopefully “put a halt to mortgage rates edging up slightly and being so volatile, offering some stability to borrowers”.

Katy Eatenton, of Lifetime Wealth Management, was similarly optimistic, saying: “Mortgage rates and swap rates have been edging up over the past couple of weeks, so hopefully this will help stabilise things and encourage lenders to start pricing downwards again.”