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Stubborn inflation levels are often cited as a reason the Bank of England’s base rate has been riding high for the last two years, but as we head into the final months of 2024, is the situation improving, and what do the latest inflation figures mean for mortgages?
What are the latest inflation figures?
According to the Office for National Statistics (ONS), inflation levels have improved significantly. The latest figures peg it at 1.7% in September 2024.
This marks the lowest level of inflation in the UK market since April 2021 and is a notable decrease on the 2.2% that was reported for August this year.
The ONS attributed the downturn to the transport industry, namely a fall in airfares and petrol prices, but cautioned that there were increases in the cost of food and non-alcoholic drinks.
Crucially, inflation levels have now dropped below the Bank of England’s target of 2%, which is certain to have a knock on effect on mortgages.
How will this affect mortgages?
The inflation data will apply pressure on the Bank of England’s monetary policy committee to cut its base rate when they meet on 7th November.
Last time out, Threadneedle Street voted in favour of holding the base rate at 5% amid concerns that inflation levels could creep back up if a premature reduction was introduced.
If the base rate was to decline, this would spell a reduction in mortgage rates, with those on tracker mortgages that are tied to it seeing an instant saving. A lower base rate would also pave the way for cheaper fixed-rate deals to arrive on the market.
That said, there is a possibility that lenders will begin repricing their mortgage deals in response to the news of lower inflation. Lenders often make rate changes in advance of a base rate announcement as they attempt to predict what the central bank will do.
Our analysis
According to our director and mortgage expert John Tarazi, the inflation drop will likely spell a base rate reduction next month, but how quickly mortgage rates will follow is uncertain.
“The Bank of England is now under more pressure to cut the base rate following the inflation drop. While this will clear the way for cheaper mortgages, we have seen some market volatility in recent weeks as lenders are cautious about a few different factors.
“First and foremost there’s the Autumn Budget, and variables like oil prices could temper the size of any incoming mortgage rate reductions.
“All in all, the fall in inflation is positive news for the mortgages industry and we are confident that lower rates are on the way, but there are still factors at play that might convince mortgage lenders to be conservative when repricing their product lines.”
