"For now, while today’s inflation figures are welcome, on the mortgage interest rate front things could still get worse before they get better."
- Peter Stimson, head of product at MPowered Mortgages
CPI inflation rose by 2.5% in the 12 months to December 2024, down from 2.6% in the 12 months to November.
This was below market predictions of 2.6% with core inflation, which strips out volatile elements such as fuel and food, down to 3.2% in December from 3.5% in November.
The lower-than-expected inflation figure has eased pressure on Chancellor Rachel Reeves after the recent spike in gilt yields. However December's fall is expected to be temporary with inflation predicted to edge up again in the coming months.
Several mortgage lenders expect that volatile inflation and higher borrowing costs could feed through to further mortgage rate rises in the coming weeks.
Peter Stimson, head of product at MPowered Mortgages, commented: “Downing Street has been resounding to sighs of relief from Number 11 this morning. The improvement in the headline rate of CPI was modest, but its psychological value is amplified by the fact it was unexpected.
“More positive still is the bigger fall in core inflation, which strips out volatile factors like energy and food costs, from 3.5% down to 3.2%.
“Nevertheless CPI is still well above the Bank of England’s 2% target, and provided tomorrow’s GDP figures aren’t horrendous, no-one should expect the Bank to bring forward its next Base Rate cut to February.
“Even with today’s progress on CPI, the Bank is walking a tight rope between the need to leave interest rates high to tame inflation and the desire to cut them to kickstart the flatlining economy.
“The mortgage markets have now priced in just two cuts to the Base Rate in 2025, with at least one likely to be at the end of the year.
“For now, there are bigger fish to fry. Swap rates, the main driver of fixed rate mortgage pricing, have been rising in recent weeks. The reasons are complex and varied, but the worry about persistent inflation is a key driver – how the markets react to this morning's news will be key.
“For now, while today’s inflation figures are welcome, on the mortgage interest rate front things could still get worse before they get better.”
Kevin Brown, savings specialist at Scottish Friendly, said: “While it is positive to see inflation’s worrying bounce-back come to a stop, the essential point here is that it remains too high. Interest rate setters will be reading these numbers with continued unease, as will the Government.
“Rate setters will be using these figures as their basis for the first rate decision of 2025 next month. It still appears fanciful that we might get one at the first meeting. There’s a good indication that we won’t be getting rate cuts as quickly as earlier believed, which households are clamouring for, as the Monetary Policy Committee's number one priority is managing price rises.
“Despite inflation coming down slightly, the message for households is still clear: we’re not out of the woods yet."
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, agreed that the headline interest rate "remains firmly above the BoE’s target of 2% and is expected to tick up from here, meaning there are 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."
Lindsay James, investment strategist at Quilter Investors, noted that markets are "now sceptical about the prospect of further rate cuts in the UK before May, pricing in less than two quarter-point cuts for the year as a whole".
He warned: "While this data will show some encouraging signs of progress, much of this is negated once mortgage costs are factored in with CPIH, the CPI index including owner occupiers’ housing costs, remaining unchanged at an annual rate of 3.5%. With government bond yields rising in recent weeks, the upward pressure on mortgages remains in place."
However, Sarah Coles, head of personal finance at Hargreaves Lansdown, said today's inflation figure is "welcome news for mortgage borrowers".
She said: "Lower inflation could help suck some of the drama out of the bond markets, which could keep a lid on the rise in fixed rate mortgages. The impact so far has been relatively muted, with Moneyfacts figures showing the average 2-year fixed rate has risen from 5.47% to 5.49%. Banks have been waiting to see whether this tempest blows itself out, and there’s the chance that today’s news may convince some of them to keep waiting a little longer.
"If you’re on a fixed rate with plenty of time to run, this will bring some comfort. Rates may rise a little from here, but it could be a relatively short-term shift, and while it’s going to be painful while it lasts, it will ease. The overall direction of the mortgage market in the coming years is still expected to be downwards."
Could we still see a February rate cut?
While many industry experts believe ongoing volatility in inflation and gilt yields could prompt a wait-and-see approach from the Bank of England, others believe there is still cope for a Bank Rate cut at next month's meeting.
William Marsters, senior sales trader at Saxo UK, said: “UK December CPI comes in weaker than forecast which should give an excuse for UK gilts to rally today after their recent lows. Consumer prices rose 2.5% year-on-year, versus the estimate of 2.6%. This is the first time in three months the metric has fallen, and will keep the door open for a BoE rate cut next month. These inflation figures will be a welcome relief for UK Chancellor Rachel Reeves.”
Luke Bartholomew, deputy chief economist at abrdn, agreed: “The small tick down in inflation will be met with a big sigh of relief in both the Treasury and the Bank of England. Another disappointing print could have led to a further sharp rise in gilt yields, piling further pressure on the Chancellor. There are still material growth and inflation risks facing the UK economy, with policymakers highly focused on seeing how firms will respond to the increase in national insurance and minimum wage coming this spring. But for now, this slightly softer report should help reassure investors that the BoE can continue with its gradual easing cycle, and we expect the next rate cut in February.”
However, Paresh Raja, CEO of Market Financial Solutions, said the key focus now "shouldn’t be on whether the BoE cuts the base rate at its next meeting or even the one after that".
He commented: “This is good news, and comes despite predictions of another small rise. However, the fact that inflation is proving sticky, remaining above 2%, is still likely to fuel arguments that the Bank of England will, or should, delay cutting the base rate. But I believe it’s still too early to make definitive predictions. We need to consider the broader context: inflation fluctuates by a few percentage points each month, and following significant fiscal events like the Autumn Budget and the lead-up to the busy Christmas period, inflation hovering above the 2% target was always a possibility.
“The key focus now shouldn’t be on whether the BoE cuts the base rate at its next meeting or even the one after that. This attitude actually creates hesitancy, encouraging a 'wait and see' approach. Instead, as an industry, we need to continue adapting to the current lending landscape and ensure that brokers and borrowers have the support they need to execute their plans effectively. While we may not see a return to lower rates as quickly as some might have hoped should inflation remain above 2%, the market has demonstrated resilience through far tougher conditions in recent years, which is important to keep in mind.
“We’ve already observed positive signs of growth in the early months of this year, particularly when it comes to house prices and buyer demand. So, if lenders can tailor their offerings to meet their clients’ needs, there’s every reason to remain optimistic about the outlook for the months ahead.”
