UK Inflation Eases To Bring Some Festive Cheer

  Examining the Impact of Latest ONS Inflation Data on Personal Finance

The most recent Consumer Price Inflation (CPI) statistic, marking a decrease to 4.2% since October 2021, spells promising news for homeowners in the UK. This development suggests a continued downward trend in fixed mortgage rates as we enter the new year. However, the situation presents a varied outlook for savers: while some may rejoice at their savings retaining greater value, others might rue missing out on previously higher interest rates which are now expected to decline.

Mortgages

Mortgage rates in the UK are closely tied to the Bank of England's base rate, which itself is influenced significantly by inflation trends. Despite a steady increase from a historic low of 0.1% in December 2021, the base rate has remained at 5.25% since August. Approximately 80% of homeowners currently benefit from fixed rates, which are set based on financial analysts' projections of future Bank rates. There is a growing consensus that these rates might begin to decrease in the coming year.

Recent figures indicate a positive shift, with the most affordable two-year fixed mortgage now offered by Virgin Money at 4.59%, a reduction from 5.96% in early August. Similarly, Barclays presents a five-year fixed rate at 4.32%, down from 5.28% four months prior. These rates are expected to drop further following the latest inflation data, although this may take several weeks to materialize, partly due to the holiday season.

This trend is likely to ease the burden for the 1.6 million homeowners who will transition from their fixed deals next year, many of whom secured rates below 2.5%.

Mortgage brokers currently hold mixed views regarding the extent to which fixed mortgage rates might fall before an official cut in the base rate. Notably, Barclays has already reduced its rates by up to 0.43 percentage points this week. Rob Gill from Altura Mortgage Finance anticipates other banks will follow this lead, suggesting that rates beginning with 'three' could become more common as lenders aim for a strong start in 2024.

Homeowners with mortgage deals ending within the next six months can secure a new rate now, with the flexibility to switch if a better offer arises.

Savings

The decline in inflation is a mixed blessing for savers. The positive aspect is the potential for real-term returns on savings for the first time in two years. For instance, those who opted for fixed-rate bonds in November last year – with the best one-year deal at 4.6%, two-year at 5%, and five-year at 5.05% – are now seeing actual earnings post-inflation.

However, the backdrop has been challenging for savers, with the CPI inflation rate previously hitting double digits and only dropping to 6.7% for the year to September. October's figure stood at 4.6%. With the Bank rate currently at 5.25% and anticipated to decrease next year, savings rates have been declining.

According to Savings Champion, the best easy-access account rate decreased from 5.25% at the end of October to 5.22% from Metro Bank recently. The top one-year fixed bond rate has also dipped from 6.11% to 5.66%, again offered by Metro Bank.

Savers should anticipate this downward trend to persist, especially in light of the recent inflation data influencing market expectations of interest rates. Therefore, seizing a savings account with an attractive rate is advisable, given that account setup typically takes around 15 minutes – a worthwhile investment of time.