Borrowers were given an early Christmas present yesterday after a sharp fall in inflation raised hopes that a rapid series of interest rate cuts will take place next year.
Such a scenario would intensify competition among mortgage lenders to offer cheaper rates – a boost for millions of home owners who are facing higher repayments when their current deals come to an end.
Official figures showed that inflation fell to 3.9 per cent in November, down from 4.6 per cent in October – and much lower than the 4.4 per cent expected by economists.
The drop, driven by fuel and food price pressures easing, means that inflation is now at the lowest level for more than two years.
The figures were a festive boost for Prime Minister Rishi Sunak, whose pledge to halve inflation from more than 10 per cent has now been exceeded by some margin.
The figures also prompted calls for a re-think from the Bank of England, which has been pushing back against talk that interest rate cuts could come soon
And they wrong-footed doom-mongers who feared that the UK was on course for a prolonged spell of much higher inflation than other advanced countries.
The figures from the Office for National Statistics also prompted calls for a re-think from the Bank of England, which has been pushing back against talk that interest rate cuts could come soon.
Financial markets are largely ignoring that and betting that with inflation in retreat the Bank will start cutting rates in the spring.
Traders see a nearly 50 per cent chance that the first cut could come as soon as March and that the Bank’s base rate – currently at 5.25 per cent – will fall as low as 3.75 per cent by this time next year.
Mortgage lenders have already been reducing the rates they offer to borrowers – and they are starting to fall below 4 per cent for the first time since May.
Today, Generation Home will cut its five-year fixed deal to 3.94 per cent for customers with a 40 per cent deposit. And Barclays has just slashed rates by 0.43 percentage points.
Mr Sunak hailed the lower inflation figures as ‘good news for everyone in this country’. Chancellor Jeremy Hunt said: ‘We are back on the path to healthy, sustainable growth’.
Danni Hewson, head of financial analysis at AJ Bell, added: ‘Some families will be dreading this Christmas, feeling guilty about the presents they’ve been able to afford or worried about paying off debts they’ve racked up just to afford the basic festive treats.
Mr Sunak hailed the lower inflation figures as ‘good news for everyone in this country’
Traders see a nearly 50 per cent chance that the first cut could come as soon as March and that the Bank’s base rate will fall as low as 3.75 per cent by this time next year
‘But it does feel like those sticky tendrils are loosening their grip.’
Inflation soared as high as 11.1 per cent last autumn as food prices and energy bills soared – a trend that was accelerated by Russia’s invasion of Ukraine.
The Bank of England has raised interest rates in an effort to bring inflation down to its target of 2 per cent.
Its last hike took place over the summer and there is now intense speculation about when rates will start to be cut, especially at a time when the wider economy is in the doldrums.
GDP growth has been weak this year and figures last week showed that it shrank by 0.3 per cent in October, raising fears that Britain may be entering a recession. Critics of the Bank’s approach fear that by keeping rates too high for too long it could make things even worse.
Tory MP Sir John Redwood said the Bank had been ‘wrong for too long’ on interest rates and should follow the US Federal Reserve, which earlier this month suggested that it would enact a series of interest rates cuts next year.
Julian Jessop, economics fellow at the Institute of Economic Affairs, added: ‘The sharp fall in inflation in November makes the Bank of England’s position on interest rates look even shakier.’
Simon French, chief economist at Panmure Gordon, said: ‘Those arguing over summer that the UK was on a sustained and higher inflation path to the rest of the developed world [are] starting to look a bit daft.’
UK inflation is still higher than in the US – where it was 3.1 per cent in November – and the eurozone – where it has fallen to 2.4 per cent – but the gap has narrowed.
