The chance of the Bank of England cutting interest rates before the end of the year has increased, in good news for mortgage holders.
Inflation in the year to September was revealed as being 3.8 per cent on Wednesday, which was lower than most economists expected.
As the Bank of England uses interest rates as a tool to keep inflation down, economists think the lower-than-predicted figure means an interest rate cut at one of the next two Monetary Policy Committee (MPC) meetings is a possibility.
Inflation is still almost twice the target level of 2 per cent, but is expected to fall over the next two years.
The Bank rate, which has a large bearing on mortgage rates, is currently at 4 per cent, but financial markets lifted their expectations for a cut at the December meeting this morning, once the inflation figure was released.
This had a knock-on effect on swap rates, which determine the rates mortgage lenders can offer to their customers.
Swap rates dropped slightly on Thursday, which experts said was down to the inflation figures.
Nick Mendes, head of marketing at John Charcol brokers, said: “That reflects a stronger expectation that the Bank may start easing a little sooner and that the path lower could be gradual from there.
“For mortgages, it’s modestly supportive. Funding costs have eased, so some lenders may trim fixed rates in the coming days. But any significant repricing will still depend on follow-through in the data and the Budget’s fiscal tone.”
Aaron Strutt, product and communications director at Trinity Financial, added: “I suspect the base rate will come down in December and if it does, then mortgage rates may edge down a bit.
“Normally when we are heading towards the end of the year some of the bigger lenders lower their rates to attract business and it may well happen again over the coming weeks.”
Thomas Pugh, chief economist at RSM UK said: “Admittedly, inflation will probably trend down only gradually from here, so we doubt this will be enough to tempt the Bank of England into cutting interest rates next month. But it does put a December rate cut back on the cards.”
A 25 percentage point cut would bring the base rate to 3.75 per cent.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “Big picture, the odds of a rate cut in the final quarter of the year have risen on the back of today’s data.
“And with Chancellor Reeves laying the groundwork for lowering the cost of living in the upcoming Budget, we continue to think that a December rate cut is very much in play.”
Earlier this month, average mortgage rates rose for the first time since February.
Experts said at the time that the upcoming Budget and sticky inflation had led to lenders repricing.
Now the average two-year fixed rate is 4.98 per cent whilst the average five-year is 5.02 per cent, according to Moneyfacts.
There are some deals still available for around the 4 per cent mark but most are reserved for those with the highest deposits or equity.
Tracker and variable mortgages tend to go down immediately after the Bank of England cuts interest rates.
Fixed mortgages, which are more common, stay the same for the duration of their term, but when borrowers come to the end of their current deal, they will be offered a new rate.
These rates go up or down based on long-term predictions for where the Bank of England base rate will go in the future, which is reflected in swap rates.
Predictions of a more rapid base rate fall can pull fixed mortgage rates down.
For existing borrowers planning to remortgage soon, new deals will vary.
Homeowners coming off short-term fixes, secured when mortgage rates were peaking in 2023, may be able to source better deals now.
However, borrowers nearing the end of ultra-low, long-term fixes taken out before interest rates began their ascent in December 2021, the outlook is gloomier and face a jump in monthly repayments.
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