Bank of England against bright blue cloudy sky

Category: government and politics

In September, inflation remained at the same level it was in August – 6.7 per cent. We look at predictions for the next Base Rate vote and the potential impact on mortgage rates.

The Office for National Statistics (ONS) has released data showing that the consumer price index (CPI), used to measure inflation, stayed the same in September as it was in August.

Petrol and diesel inflation rose after the emerging situation in Israel sparked concerns regarding the supply of oil, however this change was offset by a fall in inflation for food and drink – resulting in total CPI remaining unchanged.

According to its findings, the ONS revealed a 0.1 per cent decrease in food and non-alcoholic drinks prices from August to September, in contrast to a 1.1 per cent increase during the same period last year.

The most significant price reductions were observed in milk, cheese, eggs, mineral waters, and soft drink.

However, transportation costs saw a 0.2 per cent uptick between August and September, a reversal from the 1.7 per cent decline recorded during the same two months in the previous year.

Discussing the most recent figures on Inflation, Chancellor Jeremy Hunt has said:

As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year.

Today’s news just shows this is even more important so we can ease the pressure on families and businesses.

Jake Finney, an economist at multinational accountancy firm PwC, believes the Bank of England Monetary Policy Committee (MPC) may vote to keep interest rates where they are.

Arguing that while total CPI stayed the same, core inflation (measured as the CPI less food and energy prices) declined, lending credence to those saying that the current interest rate levels are still working.

Jake Finney, economist at PwC said:

Headline inflation remained flat at 6.7% in September, as an easing of food and household goods inflation was offset primarily by higher pump prices. More importantly for the Bank of England, core inflation nudged down from 6.2% to 6.1%, while services inflation ticked up from 6.8% to 6.9%.

These latest inflation numbers are marginally higher than expected. However, crucially they remain materially below the Bank’s expectations in August. For this reason, it still seems likely that the Bank’s near-term projections will be downgraded in November, which should be enough to keep rates on hold again.

We are still optimistic that the government will meet its target to halve inflation by the end of this year. Lower household utility prices should shave around 1.5 percentage points off headline inflation in October. Combine that with an overall easing of inflation pressures and inflation should end the year under 5%.

What does the inflation figure mean for mortgage rates?

Mortgage rates generally follow the Bank of England’s base rate, and experts are split as to whether the CPI’s September performance will result in the MPC raising the Base Rate further.

The next Base Rate decision will be announced at 12pm on 2nd November.

However, while some experts believe the MPC will decide to keep rates where they are, the headline metric for inflation remaining unchanged means it is very much a possibility that they decide to march on with a further increase. If they do, mortgage rates will likely increase too.

To hedge against any further rate hikes, borrowers coming up to their renewal date have the option to lock in fixed rate deals as soon as possible. Whilst rates are higher now than in the past, fixing ahead of further potential rises could save money.

Jorden Abbs, chief executive for specialist mortgage broker, Commercial Trust, shared the following:

We are already aware of lenders withdrawing mortgage products, in order to make rate increases, as a result of macro-economic uncertainty and the UK’s inflation position.

As a result we are urging clients coming up to mortgage renewal deadlines to call us. Our team can secure a mortgage offer three to six months ahead of time, which could mean a lower interest rate being secured, if more rises occur.

To contact an advisor to discuss your options, send your details to the Commercial Trust advising team.