Mortgages boost as interest rate rise forecasts tumble after inflation update
Interest rates could rise by less than previously feared, analysts say, in what would provide welcome relief for millions of homeowners.
It comes after Consumer Prices Index (CPI) inflation dropped by more than expected in the 12 months to June - falling from 8.7% to 7.9%.
The Bank of England has been raising interest rates to try and bring down CPI inflation, which at its highest point hit 11.1% in October 2022.
The base rate - which influences how much banks and lenders charge you to borrow money - is now at 5%.
It has been hiked thirteen times since December 2021, when it stood at a record low of 0.1%.
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By raising interest rates, borrowing becomes more expensive - this in turn means households have less money, so they should spend less and this in theory should bring inflation down.
The Bank of England will next make an interest rates decision on August 3 and analysts now widely expect it to raise rates to 5.25% instead of 5.5%.
Martin Beck, chief economic adviser to the EY Item Club, said: “Looking ahead, the EY Item Club thinks inflation should continue to fall quickly over the rest of this year.”
He added: “Taking today’s data and what it says about the future, the EY Item Club thinks another (0.5 percentage point) rise in bank rate next month is now looking unlikely.
“The EY Item Club expects a (0.25 percentage point) increase, with perhaps one more to follow in September, before the rate rise cycle comes to a halt.”
Analysts at Capital Economics are also factoring in a 0.25 percentage point increase next month, and think inflation will peak at 5.5% instead of above 6%.
Others are predicting the base rate will peak at 5.75% - of course, no one knows for sure how markets will react over the next few months.
Core inflation - the rate of price rises that excludes food and fuel, which had been rising since January this year - also dropped from 7.1% to 6.9%.
However, CPI inflation remains above the 2% target set by the Bank of England.
Just because inflation is falling, it also doesn’t mean prices are no longer rising - they are still going up, but just not as sharply as before.
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Grant Fitzner, chief economist at the Office for National Statistics (ONS), which publishes the figures, also said there is “some way to go” and pointed out that before today, inflation remained unchanged at 8.7% for two months in a row.
He told the BBC Radio 4 Today Programme: "It is a large drop but let's forget that last month we saw no change at all in headline inflation.
"In some ways what we are seeing this morning is catching up with the falls we've seen in other similar countries."
A lesser interest rate hike would be a sigh of relief for mortgage borrowers - but costs have already spiralled to a 15-year high.
The Bank of England this month said rising interest rates could cost one million borrowers an extra £500 a month by 2026.
Financial comparison website Moneyfacts also today confirmed mortgage rates have creeped up again today - despite inflation falling.
The average two-year fixed residential mortgage rate edged up from 6.78% to 6.81%, while a five-year fix went from 6.30% to 6.33%.
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