Stagflation fears continue to cast a long shadow over the UK economy, even as a surprise dip in inflation to 2.5% in December raises expectations of a Bank of England rate cut next month.
Downing Street has been resounding to sighs of relief from Number 11 on Wednesday morning.
The improvement in the headline rate of CPI was modest, but its psychological value is amplified by the fact it was unexpected.
More positive still is the bigger fall in core inflation, which strips out volatile factors like energy and food costs, from 3.5% down to 3.2%.
Nevertheless CPI is still well above the Bank of England’s 2% target, and provided tomorrow’s GDP figures aren’t horrendous, no-one should expect the Bank to bring forward its next Base Rate cut to February.
Even with today’s progress on CPI, the Bank is walking a tight rope between the need to leave interest rates high to tame inflation and the desire to cut them to kickstart the flatlining economy.
The mortgage markets have now priced in just two cuts to the Base Rate in 2025, with at least one likely to be at the end of the year.
For now, there are bigger fish to fry. Swap rates, the main driver of fixed rate mortgage pricing, have been rising in recent weeks. The reasons are complex and varied, but the worry about persistent inflation is a key driver – how the markets react to this morning’s news will be key.
For now, while today’s inflation figures are welcome, on the mortgage interest rate front things could still get worse before they get better.
Leave a Comment