Why inflation drop might not be the good news we hoped for and what it means for your mortgage

“It feels like this should be a healthy dose of good news, but anyone with a mortgage will be sickened to hear it’s not as good as it seems.”

Rishi Sunak has promised that “brighter days are ahead” after the latest easing in the rate of inflation but hopes of a cut in interest rates in just a few weeks time appear dashed.

Millions of personal borrowers and businesses facing crippling costs have been hoping for some relief amid the continuing cost-of-living crisis. The official bank base rate remains at 5.25 per cent, where it has been for more than six months now, following a series of hikes to get inflation under control. That battle looks to have been largely won.

From a peak of over 11 per cent in October 2022, the annual rate of consumer prices inflation has eased to 2.3 per cent, according to the newly released figures for April. It marks the lowest level since July 2021 when inflation was sitting at 2 per cent - the Bank of England’s target level. As a whole, prices in the shops may still be rising - there is very little deflation - but not as sharply as over the past couple of years. Inflation is “back to normal”, the Prime Minister declared, minutes after the latest numbers were published.

There are still a number of economic storm clouds hanging over the Bank of England, the UK's central bank.

Lower gas and electricity prices helped bring down the overall inflation figure in April, so that headline rate may be a little skewed. Food and drink price rises also slowed for the 13th month in a row to an annualised 2.9 per cent in April, from 4 per cent in March, and the lowest level since November 2021.

But, and it’s a large and potentially critical but, services inflation only eased very slightly from 6 per cent in March to 5.9 per cent in April, coming in ahead of the 5.4 per cent rate that some economists had been predicting. And that is going to worry some on the Bank of England’s nine-strong monetary policy committee (MPC). Their next rate-setting meeting is due to take place on June 20 and hopes had been building that an initial quarter-point cut would be announced then, taking the base rate to 5 per cent, and triggering at least one further reduction before the end of the year.

Given signs of stickiness around the core inflation rate, the smart money - and market sentiment - is swinging toward an August rate cut, at the earliest, not least as another set of inflation and labour/wage numbers will be released before next month’s MPC gathering.

Suren Thiru, economics director at accountancy body ICAEW, described the latest fall in inflation as “underwhelming” and said a June rate cut was probably off the cards.

Shoppers will have seen many prices stabilise as inflation comes off the boil but there is very little deflation - actual falling prices - around.

“Concern over hotter-than-expected headline inflation is exacerbated by disappointing declines in core and services inflation, which suggest that the problem of underlying price pressures embedded in the wider economy have yet to be solved,” he noted. “Lingering concerns over underlying inflationary pressures mean a June rate cut is unlikely. However, these figures may convince more rate setters to vote to ease policy, providing a signal that a summer rate cut is still possible.”

At May’s rate-setting meeting a couple of weeks’ ago, in a strong signal that the tide may be turning, two members of the MPC voted for interest rates to be cut by a quarter point, up from just one member in March. Bank of England governor Andrew Bailey has been increasingly dovish with his comments, more than hinting at a rate cut this summer. It now appears to be a case of when, not if.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said: “Bank of England policymakers won’t be pulling on winning jerseys just yet. They will want to see more signs that hot wage inflation is also cooling off, before they blow the whistle on this restrictive period of play. It looks increasingly likely that a rate cut may still not come until August.”

Business leaders have been pressing hard for a rate reduction and continue to do so. Tina McKenzie, policy chair at the Federation of Small Businesses (FSB), said a cut in interest rates was “starting to feel overdue”. She added: “The economic growth we all want to see will be powered to a great degree by small firms, so it is vital to get their growth ambitions back on track, not held back by cost pressures and high interest rates.”

While the latest inflation data has been described as a “make or break” moment for the Bank of England’s decision to cut interest rates this summer, many mortgage holders face a make or break dilemma of their own. Indeed, more than a million are due to end fixed-rate periods this year.

“Many mortgage holders have had their household budgets stretched to the extreme over the last couple of years,” said George Sweeney, financial advisor at personal finance site Finder.com. “Over a million are due to end fixed-rate periods this year, so will have had fingers and toes crossed for a more solid signal that the Bank of England would finally begin to lower the base rate in the upcoming MPC meetings this summer.

“It remains to be seen whether they will be satisfied enough with these numbers to take action in June or August. With all the effort it’s taken to get this far, they’re going to want to avoid jumping the gun and acting too hastily.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, added: “It feels like this should be a healthy dose of good news, but anyone with a mortgage will be sickened to hear it’s not as good as it seems. For anyone on a variable rate mortgage, nothing will change until we get rate cuts, and the timing of those still hangs in the balance.

“Fixed mortgage rates had been moving in the wrong direction for months. There is still hope that lower inflation will inspire some to price in an earlier cut, but we may not see any significant change in the market for a while.”

Moneyfacts figures show that the average two-year fixed rate mortgage rose from 5.56 per cent at the end of January to 5.93 per cent now, and cheaper deals may be some months off. Some borrowers may opt to switch to a variable rate in the meantime.