Inflation has fallen to 2.5% raising the prospect of interest rates being cut in February.
It came as a surprise this morning when the Consumer Price Index for November was 0.1% lower than the previous month.
This means the price of goods and services has grown by 2.5% over the year to November 2024, compared to 2.6% annually to October 2024.
No one had expected inflation would be lower so the news will be welcomed by consumers.
And it also offers greater hope the Bank of England (BoE) will lower interest rates when their decision makers, the Monetary Policy Committee (MPC), meet on 6 February.
David Hollingworth, associate director at L&C Mortgages said: “The surprise dip in inflation is some positive news for borrowers who will have been unsettled by the recent unrest in the gilt markets and what it may mean for mortgage rates.
“Although there may still be increases to come in the months ahead, the fall in inflation will firm up the hopes that the Monetary Policy Committee will cut the base rate in February.”
Indeed, he explained, three of the nine members of the MPC voted in favour of a cut in December, when the Base Rate was held at 4.75%. This shows there was some appetite for a reduction in the rate.
But Hollingworth explained, the market – and specifically mortgage lenders – had been anticipating there would not be a rise in February.
“That,” he explained, “has seen fixed rates edging higher before the end of the year, something that’s continued into the new year.
“This will have added an unwelcome dollop of uncertainty for borrowers that had been hoping for continued improvement in mortgage rates. The base rate is still expected to fall but the question is whether that drop will now be shallower and more gradual.”
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, the online investment platform, said inflation still remained firmly above the BoE’s target of 2% and was expected to tick up from here, meaning there were no guarantees for borrowers.
She added: “The average cost of a new fixed-rate mortgage has been volatile since the Budget, with some lenders repricing their products to reflect shifting interest rate expectations.
“With inflation potentially edging up further in the coming months, this would only prolong the pain for borrowers hoping for some respite from sky-high payments.
“Buyers and sellers will now be on tenterhooks to see when the next interest rate cut might materialise.
“For now, borrowing costs remain relatively high and with the mortgage market mired by uncertainty, first-time buyers and existing homeowners looking to secure a new deal soon may be feeling on edge.
Need a mortgage or remortgage in 2025? What’s the advice?
Anyone looking at taking out a mortgage – whether it’s to purchase a home or to refinance because your current deal is ending – is being advised to speak to a broker or adviser.
Haine said with the gap between average two- and five-year rates narrowing, according to Moneyfacts data, and much uncertainty around rate cuts, it would be helpful for a professional to help you seek the best option for your finances.
“Choosing whether to lock in for a shorter or longer period and whether to opt for a fixed or tracker product will require careful consideration,” Haine added.
Hollingworth suggested borrowers coming to the end of their deal later in the year, start reviewing options now. He said: “Today’s figures will help to maintain some stability in mortgage rates but those borrowers coming to the end of their current deal are still likely to want to secure a new rate a few months ahead of time.
“That will allow them to dodge any further increases if fixed rates continue to rise but still gives them room to review if things take a turn for the better.”
