Inflation comes down to 6.8%

The inflation nightmare has returned to haunt markets yet again. Although the headline figure dropped substantially and matched what the market was expecting, it's the core figure that will alarm the Bank of England as it remains sticky at 6.9%. This was in part thanks to resilient spending in restaurants and hotels as well as recreational and cultural activities, both of which have been the superglue in sticky services inflation. Either way, today's print will be seen as a mixed bag. While it confirms that inflation is falling, the fact that services inflation remains hot means that it's becoming increasingly likely that the MPC will have to raise interest rates to 6% or higher. As such, cuts to mortgage rates may take a breather until September. But with another wage growth print before the next Bank of England meeting, it's possible that a lower number could cool change the narrative. Either way, investors and lenders alike will have to brace for another month of volatility.

This further fall in inflation is good news for mortgage borrowers and should allow lenders to continue with recent rate cuts. As lenders seek to make catch up following a longer than usual summer slowdown, an all-out mortgage price war in September looks increasingly likely.

Its fantastic to see that CPI has slowed further for a further month, but a sticky core CPI is firmly in the rear view mirror and could be the catalyst for further increases to the base rate from the Bank of England. If the markets also see this fueling further increases, we could quickly see the price reductions we’ve seen in recent weeks on fixed rate mortgages being undone and head back in a direction we don’t want to see.

With core inflation not moving from June, it is more than likely going to be another 0.25% at the next MPC meeting. The good and bad news is that with lenders reducing their rates over the last 2 weeks it is unlikely to have any impact to the mortgage rates which will mean a much needed month of stability, however it will also mean that we won’t see any more mass rate reductions for a while.

Wednesday's figures showing a decrease in CPI inflation, mostly due to energy prices, is good news for the UK. However, the stubbornness of core inflation could mean that the Bank of England might raise rates again soon. While this situation seems promising for those with mortgages, the benefits might not last if the markets become wary of the risks linked to core inflation. Leaders might enjoy the positive headlines, but homeowners should be careful. The favourable mortgage rate reductions might change direction, so it's best for homeowners to plan ahead. In simple terms, while there's some good news now, future challenges might arise.

CPI continues to fall, which is great news, though the latest drop seems to be broadly in line with market expectations. All eyes now are on wage growth, after this week's alarming figures showing them rising at the fastest rate since records began in 2001. Once that subdues, and inflation falls below 5%, I think it's likely we'll see the base rate being lowered and mortgage rates falling below 5%.

With core inflation remaining stubborn, it’s likely a catalyst for the BoE base rate to increase once again at the next meeting.
Hopefully the overall inflation reduction doesn’t spook the markets and we can see a period of calm from lenders and their pricing. If markets get spooked though we could quickly see a reversal of the recent rate cuts.

Mortgage rates are likely to remain on course for now at least, to continue in the same vein, with small incremental reductions expected across the market, following the latest inflation data being released. Whilst there is still uncertainty about whether Andrew Bailey will further hike the base rate in response to the wage price growth data released yesterday, mortgage lenders are still likely to continue with the price reductions witnessed over the last few weeks, in order to hold their market share.

With the CPI hitting its mark or even exceeding optimistic expectations, we should be in for a welcome period of steady and stable mortgage rates, putting recent ups and downs to rest. However, the persistently high core number casts a shadow on hopes for significant rate cuts in the near term. Lenders are likely to focus on service-based adjustments rather than major rate shifts after recent decreases.

The release of the next round of inflation data just before the next BOE rate announcement in September holds the key and may determine whether the last quarter of 2023 will be a beacon of hope or a cloud of uncertainty for mortgage borrowers.