UK inflation shock: This is what the rise to 2.3% means for your savings and borrowings

Interest rates are likely to remain higher for longer after an “extremely worrying” rebound in inflation, analysts have warned.

Bank of England policymakers now seem unlikely to push the button on a further reduction in borrowing costs this side of Christmas after the consumer prices index (CPI) measure of inflation pushed back above the central bank’s 2 per cent target. Economists said it could be as late as mid 2027 before inflation sustainably returns to that target level.

The latest Office for National Statistics (ONS) data showed that CPI rose to an annualised rate of 2.3 per cent for October, up from 1.7 per cent in September and slightly ahead of what analysts had been expecting. It marked the sharpest month-on-month increase in the rate of inflation for two years and was driven in large part by an increase in household energy bills last month.

Volatile inflation makes keeping an eye on savings rates essential.

Kevin Brown, savings specialist at Glasgow-based financial mutual Scottish Friendly, said inflation warning signals were now flashing, with energy bills likely to rise again in the coming months.

“A 0.6 percentage point spike for the inflation figures is extremely worrying as we enter the winter months,” he said. “It is a clear shot across the bows of both rate setters and the UK government at a time when rates are being cut and businesses are warning of inflationary tax increases.

“All eyes will now turn to a government and rate-setter response to these unwelcome figures. We will have to wait till December 19 for the next monetary policy committee (MPC) meeting for an indication on the base rate. In the meantime, households need to ensure they are prepared for unexpected costs as much as is possible under the circumstances. At the moment with savings account rates falling, investing could be a better alternative.”

With two interest rate cuts so far this year, in August and at November’s meeting, taking the official bank base rate down to 4.75 per cent, the Bank of England will probably feel that it is time to press the pause button at its final meeting of the year. The first meeting in the new year is due to take place on February 6.

The Office for National Statistics said an increase in household energy costs particularly contributed to the latest rise in inflation.

High interest rates have been used by the central bank to put pressure on spending demand from consumers and businesses and help bring down inflation, after it soared as high as 11.1 per cent in October 2022.

Joe Nellis, economic adviser at accountancy practice MHA, which has offices in Edinburgh and Aberdeen, said: “Another cut in interest rates this side of Christmas is now extremely unlikely, and rate cuts will be slower to materialise than expected in the New Year. However, in the longer term the relatively small uplift in inflation expected over the next few months is manageable and will not be enough to lead the BoE to backtrack and reverse its cuts.”

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said: “This month’s unwelcome return above the inflation target is unlikely to be a one-off: inflationary pressures look set to keep prices rising more quickly. The fact that core inflation rose again, from 3.2 per cent to 3.3 per cent, indicates that rising energy prices aren’t the only issue. Even when they’re stripped out, prices are on the up.”

Mark Hicks, the investment firm’s head of active savings, said savings rates have fallen significantly over the past 12 months on the back of cooling inflation and lower central bank rates. “But this isn’t a straight line,” he noted. “Over recent weeks and months, inflationary expectations have built both in the US and the UK, which has been better news for savings.

“Banks always have one eye on rates in the future when deciding what fixed deals to offer, so growing indications that rates could stay higher for longer have ensured they remain rewarding. With plenty of savings accounts still offering over 4.5 per cent, cash is still a very attractive asset class. Indications that inflation is set to be above target for some months mean there’s less chance of multiple base rate reductions, so savings rates should remain relatively stable into the year end.”

He said some of the best rates in the savings market could be found on platforms, with a handful of rates at 5 per cent or above still available.

Rob Morgan, chief investment analyst at Charles Stanley, said: “Many households and businesses will be hoping for further interest rate cuts to lower borrowing costs. However, owing to the greater uncertainty of the trajectory for inflation and wage growth the pace of cuts will likely be slow and steady. It will therefore be a case of continuing to battle against higher interest costs.”

Hargreaves Lansdown’s Coles said that for those looking for a new fixed rate mortgage deal, or with a remortgage looming, inflation was even more likely to “trip them up”.

She added: “Rates have already been rising. Moneyfacts puts the average two-year fix at 5.52 per cent - up from 5.41 per cent a month earlier. Given that the Bank of England doesn’t expect stubborn inflation to hit the target any time soon, we’re likely to see higher rates continue to be priced into mortgages for the rest of 2024.

“If you’re in the market for a remortgage, the HL Savings & Resilience Barometer found that the rise in mortgage rates will hit people in their late 40s hardest, because this is the age when our mortgage repayments are most expensive. They average £811 a month at that age - compared to £727 overall.

“And for those in pricier parts of the country, or who have traded further up the property ladder over the years, they’ll be far higher. Given that rates aren’t expected to fall dramatically in the near future, the sooner you make a plan for covering these extra costs, the better.”

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