The UK’s inflation rate jumped from 2.5% to 3.0% in January, the highest level in 10 months, with Treasury minister James Murray conceding that the road to the 2.0% inflation target would be “bumpy”.
His sobering response has been broadly echoed across the mortgage sector.
L&C Mortgages associate director David Hollingworth commented that just as last month’s data brought a bit of cheer to the New Year for borrowers these latest figures could cut any celebration short.
“Just as the better-than-expected data last month helped to ease the market rates down, this is a bigger jump than many would have anticipated.
“We’ll see how the swap markets react, but it would be little surprise if we see them edge a little higher again.
“The base rate cut and the improved market outlook for rates had helped to fire new, lower fixed rate mortgage launches. That has even seen the odd deal dipping back below 4%, albeit with big fees.”
Hollingworth added that the inflation data could put some serious drag on any further momentum building for fixed rate cuts. “ With margins so tight for lenders, it could at best see fixed rates holding or at worst apply some upward pressure.”
MPowered Mortgages head of product Peter Stimson commented: “Optimists have been quick to point out that much of the painful surge in CPI is down to one-off factors like the introduction of VAT on school fees in January and the annual increase in rail and bus fares.
“But even the most indulgent reader of this data has to admit that hopes of an imminent interest rate cut have been dashed.
He added: “For all its desire to support the UK’s stagnant economy, the Bank of England’s day job is to get CPI down to 2% and keep it there. At 3%, CPI is now way off target and there is plenty of scope for further inflationary pressure.”
Inflation headed in wrong direction
AJ Bell head of investment analysis Laith Khalaf said that with inflation now 1% away from target and heading in the wrong direction, consumers had better buckle up for prices to trend higher throughout this year.
“The market is still expecting two interest rate cuts from the Bank of England in the next six months or so. It’s easy to see why. Gloomy economic projections from the central bank suggest a paucity of domestic demand, and two members of the rate setting committee actually wanted to cut rates to 4.25% at the last vote.”
He pointed out that while the Bank’s central forecasts showed inflation falling back to 2% in the medium term based on rate expectations, those expectations were measured in January, when global inflation fears drove yields and rates higher.
“There are risks to the market’s view that rates will move lower throughout this year. At 5.9%, pay growth is high and seems to be on a rising trend, which may be pumped up by the rise in the National Living Wage.
A strong dollar and trade tariffs could also add to inflationary pressures. To cut rates in the coming months, the Bank of England would need to do so in the face of what it admits will be rising inflation.
“Of course, the Bank must look to the longer term when it comes to monetary policy, but cutting rates while inflation is heading in the wrong direction is still a pretty sticky wicket.”
