The Consumer Prices Index (CPI), which measures the rise in the price of goods and services over the last year, was at 3.9% in November and was expected to fall again in December.
So, the news today that inflation had inched up came as a surprise. But it has also diminished the chances the Bank of England (BoE) will cut interest rates next month.
Indeed, the central bank has been increasing interest rates in an attempt to bring down inflation. And so far it had been succeeding, with the BoE decision makers, the Monetary Policy Committee (MPC), voting to keep rates at the same level of 5.25% on the last three occasions.
There had been hope, if inflation were to fall again, this might prompt the BoE to reduce interest rates when it next meets on 1 February. But today’s data has altered that view.
Colleen McHugh, chief investment officer of Wealthify, said: “Hold, cut or raise interest rates in February? Today’s CPI release for December is the Bank of England’s last inflation snapshot before their February meeting, and hopes of an early cut have surely been dashed.”
She added: “Yesterday’s release, which showed wage growth slowing, and now falling below the Bank of England’s November projections, suggests that while the door to rate cuts remains open, February is likely too ambitious.
“Market pricing for a rate cut in May remains unchanged, though. Patience is a virtue as they say, and whether the rate-cutting cycle commences in the early summer or autumn, the wait won’t be long, and the countdown is on. Inflation is coming down.”
Inflation rise – how will it impact mortgage rate cuts?
With the chances of an interest rate cut now off the cards, experts think this may also put an end to mortgage price cuts.
Hannah Bashford, director at Model Financial Solutions, speaking via the Newspage agency, said: “The small rise in CPI is not that surprising given that we were looking at December and it is the month of indulgence.
“I would hope that the level of increase won’t mean there is any increase in the base rate at the next MPC meeting but we could see a cooling of the rate war that has been raging for the first two weeks or so of January.”
For anyone with a remortgage due in the next few months, the advice is to keep your ear to the ground.
Alice Haine, personal finance analyst at Bestinvest, said: “Existing mortgage holders have up to six months to nail down a fresh deal, with those that lock in an offer able [to] request a better deal with their lender right up until two weeks before the new term starts, making it imperative to track mortgage rates throughout that six-month period.”
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