Inflation stuck at 2.2%: What this means for interest rates, your mortgage and your savings

Steady. Reassuring. Those were the two words featuring most prominently amid the flurry of reaction to the latest official inflation figures.

The news that the annual rate of consumer price inflation was unchanged last month at 2.2 per cent came as little surprise - most economists had expected it to hold steady after nudging up to that level from 2 per cent the month before. The Office for National Statistics (ONS) said price pressures gathered pace in the key services sector during August as air fares jumped higher. This offset a fall in the prices at the petrol pump.

The latest figures were released just a day ahead of the Bank of England’s next interest rate decision - widely anticipated to be a vote in favour of a hold.

The likelihood of further interest rate cuts this side of Christmas has resulted in savings rates coming off the boil.

Some of those central bank policymakers will no doubt be concerned that inflation has remained above their 2 per cent target for the second month in a row, after rising for the first time this year in July. They are also sure to fret over the latest services sector inflation rate, which jumped to 5.6 per cent in August from 5.2 per cent in July, largely as a result of those higher air fares. Core consumer price inflation - excluding energy, food, alcohol and tobacco - came in at 3.6 per cent, up from 3.3 per cent in July.

We have pulled back considerably from the double-digit price hikes of a couple of years back, which culminated in an annual inflation peak of 11.1 per cent in October 2022. Nevertheless, many everyday items are still nudging up in price, with very few falling back. Cooling inflation is not the same as deflation. Consumers and businesses are also facing higher energy costs, once again, heading into the colder months.

Bank of England rate-setters will be all too aware of those inflationary pressures but have to weigh them against a sluggish UK economy and weak business investment. The chances of a back-to-back rate cut this week after August’s quarter-point cut to 5 per cent remain low, however.

Much more likely then, that the bank decides to keep interest rates on hold this month and opt for cuts at its subsequent meetings on November 7 and December 19. That is the scenario being priced in by financial markets, which still see two cuts taking place before the end of the year, which would take the UK base interest rate down to 4.5 per cent.

There is mixed news for those with a mortgage.

Jonathan Bone, lead mortgage adviser at homeownership site Better.co.uk said it was frustrating to see that inflation wasn’t budging, with the situation likely to delay any hopes of lower mortgage rates.

“It is a tough pill to swallow for those needing to remortgage this year or first-time buyers waiting for rates to drop,” he added. “To improve your chances of securing a good deal, remember that a larger deposit generally leads to better mortgage rates, five-year fixed-rate mortgages often offer more favourable terms than shorter-term ones, and a strong credit score is essential.”

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said mortgage borrowers on tracker rates would have to wait a while longer for the next cut in their monthly payments, adding: “It demonstrates just how much uncertainty is involved when you peg your biggest monthly cost to a variable rate.”

She said there was better news for those looking for a new fixed rate deal, or with a remortgage looming.

“This time last year the average two-year fix was 6.6 per cent, whereas now Moneyfacts figures show it’s 5.48 per cent,” Coles noted. “It’s one reason why mortgage approvals have risen, and buyers are returning to the market.

“For anyone counting the days to a remortgage, the news is better too. The HL Savings & Resilience Barometer shows that remortgagers are likely to be moving from a rate of 2 to 2.5 per cent to one under 5.5 per cent. It’s still a doubling of the rate for many people, but given that some remortgagers faced a tripling of their rate overnight when rates were surging, they may well be counting their blessings.”

With the markets still pricing in those two pre-Christmas interest rate cuts, savers have seen the rates offered on cash ISAs, bonds and other general savings accounts come off the boil. Aside from one hold-out in the one-year fixed rate market, fixed rates have now largely fallen below the 5 per cent mark. For those looking to squirrel cash away in an easy access account, it is still possible to top 5 per cent, but in general rates are only heading in one direction.

Coles added: “There are some really strong deals around, especially on short-term fixed rates, so you can still lock in a great rate. Don’t feel you have to pick a single account. If you need sums at various points over the next five years, you can take a mix-and-match approach, using different banks, savings accounts and cash ISAs for different periods, to build the savings mix that suits you.”

David Murray, financial planning expert at investment giant Abrdn, noted: “You could consider exploring different tax allowances to make your money work as hard as possible, whether that’s considering high-yield savings accounts that offer the best interest rates, or keeping your hard-earned cash in ISAs to help boost your net returns.”

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