Inflation fell to 3 per cent in the year to January, according to figures published by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) remains well above the Bank of England’s (BoE) 2 per cent target but has fallen from the previous reading of 3.4 per cent.
It had now reached its lowest level since March 2025, when it was 2.6 per cent.
Most economists had expected a fall and experts believe the rate will continue to get closer to the Bank’s target as the year goes on.
As a result, forecasters now expect interest rates – which are at 3.75 per cent – to fall in the coming months.
Core CPI, which excludes volatile measures such as energy, food, alcohol and tobacco prices, fell from 3.2 to 3.1 per cent, while services inflation fell from 4.5 to 4.4 per cent.
The Bank of England had forecast inflation to hit 2.9 per cent, before continuing to fall towards its 2 per cent target later in 2026, but most other forecasters expected the rate to hit around 3 per cent.
What will happen to inflation in the future – and what does it mean for interest rates?
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Most experts expect inflation to fall throughout the course of the year.
Pantheon Macroeconomics expects inflation to go as low as 2.2 per cent by June, while Deutsche Bank says it expects inflation to be between 2 and 2.5 per cent for the remainder of the year.
When inflation stays high, prices rise more quickly, increasing the likelihood that the Bank will keep interest rates elevated for longer.
The Bank tends to cut rates when inflation is at or close to target, as higher rates are used to suppress price rises.
There is debate over how many more interest rate cuts will be seen in 2026. The base rate currently sits at 3.75 per cent.
However, there is expected to be at least one in the next few months, and some economists have brought their predictions forwards.
For example, Pantheon Macroeconomics expected the next cut to be April earlier this year, but has recently moved its prediction to March.
What does this mean for mortgages?
While mortgages are not directly determined by inflation, many products are influenced by the BoE’s base rate, which in turn is shaped by inflation.
Tracker mortgages and standard variable rates move directly with interest rate changes, while fixed-rate deals tend to follow swap rates, which reflect long-term expectations for the base rate.
Mortgage rates are broadly expected to fall throughout 2026, with many lenders already making cuts to rates in January.
Santander cut mortgage rates for first-time buyers last week, trimming deals across its low-deposit range.
Two-year fixes for buyers with 5 to 15 per cent deposits, known as 85-95 per cent loan-to-value (LTV) are falling by up to 0.23 percentage points, three-year fixes by up to 0.32 percentage points, and five-year fixes by up to 0.17 percentage points.
If the BoE cuts interest rates further this year, mortgage lenders will likely make further cuts.
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What does it mean for savings?
High inflation is bad news for savers as it erodes the value of money held in the bank.
The effects of inflation on the BoE’s interest rate also impact savers, because of the base rate’s influence on savings rates. Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
For example, Chase pays 4.5 per cent to new customers, with a one-year 2 per cent fixed bonus on top of its 2.5 per cent variable rate. This is app-only and you only need to deposit £1.
Savers are encouraged to shop around to find a deal that works for them, especially if they have left their money in a low-interest account for some time.
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