Inflation Drop’s Big Question - will interest rates fall sooner, not later?

Consumer Price Inflation in November was 3.9 per cent - significantly lower than the 4.4 per cent expected by many analysts.

It’s been interpreted as good news for the housing market and for the many - like landlords - banking on capital appreciation. 

Property industry analyst Anthony Codling says: “This is good for the UK housing market. As CPI falls it is likely that, over time, mortgage rates will follow suit. We expect that the news will re-ignite the debate about when Bank Rate will start to fall. 

“Falling mortgage rates mean more people will be able to buy a home and activity in the housing market is likely to rise which is likely to underpin house prices, reducing the risk of house price falls in the new year.”

Helen Morrissey of business consultancy Hargreaves Lansdown says: “Such a drop could be taken as a sign that the Bank of England has gone as far as it needs to in its interest rate hiking cycle. Keeping the pause button pressed will be welcome news for those on variable rate mortgages who have seen their costs rise as well as those with credit card debt. Fixed rate mortgages could fall slightly, as any the prospect of further rate rises fade but we’re not expecting any big moves until the market starts to expect a rate cut – which could be some time off yet.”

She says that the latest inflation drop is good news but cautions that the UK still lags behind other countries such as Germany and is still well above the Bank’s 2.0 per cent target. 

Morrissey adds: “Things can also change rapidly - if we see fuel prices spike again or a strong growth in wages, then we could still see a rate rise. Similarly, if the economy looks to be weakening, we could see a rate cut materialise sooner than we think.”

Inevitably the better-than-expected interest rate fall has triggered speculation about whether the Bank of England will now drop interest rates sooner than anticipated.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “The inflation news has pegged swap rates back further, with five-year swaps falling to 3.45 per cent, while two-year swaps are slightly higher at 4.11 per cent.

"The next move in base rate is almost certainly downwards; the question is how soon? Increasingly, speculation suggests May/June, which will come as welcome news for hard-pressed borrowers. In the meantime, lenders continue to reduce their mortgage rates, and will be keen to get 2024 off to a good start after a disappointing 2023. If mortgage rates continue to fall and borrower affordability continues to improve, we would expect transaction numbers to improve."

Ranald Mitchell, director at independent broker Charwin Private Clients, comments: "The 2.0 per cent inflation target seems within touching distance now, and will surely put pressure on the Bank of England to ease up rates, possibly in February, at the first opportunity. Owner Occupiers Housing costs (OOH) also seem to have peaked, with a slight drop. With mortgage lenders battling away in their pricing war, it may be that the savage increase in mortgage repayments for the circa 1.4m ultra-low fixed rates maturing in 2024 may be a lot softer than anticipated."

And Emma Jones of Whenthebanksaysno adds: “Predictions are saying that May will see at least a 0.25 per cent reduction in rates but drops in inflation could help us see those reductions much sooner. It also reduces the chances of more rate hikes. The competition from high street lenders will start to heighten as they scrabble for business with rate wars likely coming in again January and through the first quarter. This could be a good time for borrowers again after a very unstable 12 to 18 months."

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