The Bank of England (BoE) wrapped up 2024 by holding the base rate at 4.75%, a decision influenced by economists’ warning that measures introduced in Labour’s Autumn Budget could drive short- to mid-term inflation.
In October, Chancellor of the Exchequer Rachel Reeves unveiled the Autmun Budget featuring £70 billion in spending and £40 billion in tax increases. A significant portion of this funding is set to come from higher National Insurance contributions by employers.
This policy shift has left many British businesses planning price increases in early 2025. According to a survey conducted by the British Chambers of Commerce involving 4,800 companies, these price hikes are expected to impact consumers soon.
However, as reported by the BBC on January 15th, inflation actually fell to 2.5% in December, increasing speculation that a base rate cut could be on the horizon.
The 0.1% dip was driven by falling hotel prices and smaller rises in airfares than usual, but prices continue to increase faster than the BoE’s target in general.
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What Are the Current Inflation Figures?
Until recently, inflation, as measured by the Consumer Prices Index (CPI), has been climbing steadily:
- 1.7% September
- 2.3% October
- 2.6% November
- 2.5% December
The rise has largely been driven by higher energy, fuel and clothing costs, underscoring the pressures on household budgets.
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How Has Rising Inflation Changed Base Rate Forecasts?
While the Monetary Policy Committee (MPC) narrowly voted to maintain the base rate in December 2024, with three of its nine members advocating for a cut, the trajectory for 2025 now appears more conservative. Rising inflation prior to December has tempered expectations for aggressive rate reductions.
The Office for Budget Responsibility (OBR) estimates that the measures outlined in the Autumn Budget will add 0.4 percentage points to inflation at their peak impact.
While this may seem modest compared to the October 2022 inflation peak of 11.1%, it has been sufficient to cause economists to revise their interest rate predictions.
Nonetheless, many experts still foresee one or two rate cuts in 2025, though the pace and timing remain uncertain.
Some experts are forecasting the first rate cut will be in February 2025, but this is yet to be widely accepted.
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How Do Interest Rates Control Inflation?
Interest rates are the Bank of England’s primary tool for managing inflation.
Here’s how it works:
Raising Rates:
Higher interest rates make borrowing more expensive, reducing disposable income for households and businesses. This dampens spending and slows price increases.
Cutting Rates:
Lower rates leave households with more money to spend, potentially increasing demand and driving up prices.
However, prolonged high rates can lead to slower economic growth, as businesses face higher borrowing costs and may scale back operations.
This could risk tipping the economy into recession, with rising unemployment as a likely consequence.
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What Do Falling Interest Rates Mean for Mortgages?
While mortgage rates have eased from their 2023 peaks, they remain elevated compared to pre-pandemic levels:
August 2023 Peaks:
Average two- and five-year fixed rates were 6.85% and 6.37%, respectively (Moneyfacts).
Current Rates:
These have fallen to 5.48% (two-year) and 5.25% (five-year)(financial reporter).
In general, mortgage rates come down with the base rate; however, if the base rate is widely predicted to fall, lenders will begin to lower their mortgage rates in advance of the base rate being lowered.
This has been the case recently with HSBC, Natwest and Santander (amongst others) all lowering their rates. For this reason, now might be a good time to lock in a new deal if you’re due to remortgage in the next six months.
This is supported by Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, who encourages borrowers approaching remortgages to take proactive steps.
She recommends, “instead of trying to guess what’s going to happen tomorrow, the most sensible approach is to do the right thing for your own circumstances today.”
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Need Help with Your Mortgage?
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If you’d like to know your financial options, contact us today at 01489 346624 or fill out our contact form to start your journey.
