Inflation unexpectedly nudged downwards in the 12 months to December, boosting hopes of abase rate cut when the Bank of England’s Monetary Policy Committee meets in February.
The Consumer Prices Index, which is the Government’s preferred measure of inflation, fell to 2.5% in the 12 months to December, down from 2.6% in November, according to the Office for National Statistics. It is the first time that inflation has dropped for three months.
The dip was due to lower hotel prices, the ONS said, and tobacco costs increasing by less than in December 2023.
How could this affect your mortgage?
When inflation falls, this can impact on mortgage rates because the Bank of England uses the rate of inflation, amongst other factors, to help it determine whether the base rate should go up or down.
Although the base rate was held at 4.75% in December, 3 member of the Committee voted for a cut, and many commentators are expecting a reduction in February, which would be positive news for those on variable mortgage rates.
There was other positive financial news this week, with the UK economy having expanded by 0.1% month on month in November, the first time it has grown in three months. However, this was below expectations of 0.2% growth.
The uptick in growth was due to stronger trade in pubs, restaurants and the construction sector. Despite the fact only a small amount of growth was seen in November, this combined with the easing inflation numbers, should mean there’s more hope we’ll see a rate cut sooner rather than later.
That said, inflation continues to exceed the Bank of England’s 2% target, so several rate reductions could be unlikely. Cutting rates makes the cost of borrowing cheaper, which can fuel inflation further.
If your current mortgage deal is finishing soon, it’s worth seeing which deals are available now, rather than waiting for base rates to fall. That way if you spot a deal you like, you can secure it now, but you’ll still have time to switch if rates reduce and a better deal becomes available.
Always remember to look at the overall cost of any deal, including arrangement fees, rather than focusing on the headline rate alone, and seek professional advice if you’re not sure which mortgage is likely to be best for you based on your individual circumstances.
