Inflation fell beyond expectations on Wednesday, raising hopes that the mounting pressure on mortgage rates may soon alleviate. According to data from the Office for National Statistics, the Consumer Prices Index (CPI) inflation stood at 7.9 percent in June, a decrease from May’s 8.7 percent and the lowest level in 15 months.
The main driving force behind the drop was the decline in fuel prices, while food price inflation also receded from 18.7 percent in May to 17.3 percent, although still significantly high. Core inflation, which excludes food and energy costs, exceeded predictions and decreased to 6.9 percent compared to the anticipated 7.1 percent.
To combat persistent high inflation, the Bank of England has been gradually raising the base rate. However, the latest figures have instilled hope that interest rates may not need to climb as steeply as previously feared in August, potentially alleviating the ongoing cost of living crisis.
Andrew Montlake, a representative from mortgage brokers Coreco, suggested that there could be a slight relief as swap rates used by lenders to price mortgages may ease, signaling that the interest cycle may be closer to its peak than anticipated. Montlake also urged the Bank of England to exercise restraint in their decision-making.
Economist James Smith from ING cautioned that the upcoming interest rate hike decision by the Bank of England next month will be a “close call.” The accelerated pace of wage growth, the fastest in over three decades, adds complexity to the decision. Smith stated, “Will this convince the Bank of England to opt for a 25 basis point rate hike in August? We think it probably will, but it’s going to be a close call.”
According to Moneyfactscompare.co.uk, the average two-year fixed-rate homeowner mortgage rate increased from 6.78 percent to 6.81 percent, while the average five-year fixed residential mortgage rate rose from 6.30 percent to 6.33 percent.
Prime Minister Rishi Sunak emphasized that halving inflation remains his “top priority,” highlighting its impact on the cost of living. Chancellor Jeremy Hunt echoed the need to adhere to the plan for curbing inflation, emphasizing the ongoing pressure on families due to high food price inflation.
Shadow Chancellor Rachel Reeves, on the other hand, criticized the persistently high inflation and attributed it to “Tory economic failure,” emphasizing the burden it places on families nationwide.
As the government and the Bank of England evaluate the latest data, the decision on interest rate adjustments in August will be crucial, with the aim of striking a balance between curbing inflation and alleviating the financial strain on consumers.