The rate of inflation continued to fall in March, with the headline Consumer Price Index dropping to 3.2% — although this was slightly higher than economic forecasts.
Mortgage experts welcomed this downward trend, but said ‘sticky’ UK inflation could mean the Bank of England postpones an early summer rate cut.
The Bank of England has repeatedly said that it will not start to reduce interest rates until there are clear signs inflation is under control.
March’s CPI figure were only a slight decrease on February’s figure of 3.4%, and still some way above the Bank of England’s 2% target.
L&C associate director David Hollingworth says reduction in the headline rate of CPI was welcome. “It is a step in the right direction towards the point when the Bank of England may begin to ease interest rates back.
“With a larger fall expected next month some may be hoping a cut will come sooner rather than later. However, the Bank is likely to take the threat of inflation remaining higher for longer seriously and has repeatedly suggested it won’t act until it’s sure that inflation is under control.”
Private finance technical director Chris Sykes says: “While there is a positive trend in inflation, lingering risks could potentially postpone a summer rate cut.”
He adds that BoE will keep a watchful eye on unpredictable events impacting on oil prices and the stronger-than-expected real earnings growth. Sykes points out that UK inflation remains higher than that in Europe, and adds that the BoE will be mindful of economic data from the US this week which showed inflation rising again.
Others in the industry called on the Bank of England to take “bold” action in response to the continued downward trend in inflation.
SPF Private Clients CEO Mark Harris says: “With inflation continuing to move towards the Bank of England’s 2% target, it’s time for the rate setters to be bold and start cutting interest rates. There is a sense that buyers and sellers are holding fire waiting for that first rate reduction, and when it comes, it will give the housing market a welcome boost.”
He pointed out that swap rates have already risen this morning in response to concerns that an interest rate cut could be delayed and this will impact the pricing of fixed rate mortgages. “Five-year Swap rates rose this morning to 4.21 per cent from 4.14 per cent yesterday and until they are consistently falling, lenders are unlikely to reduce mortgage rates further.”
However Sykes says less positive inflation news from the US did not had an adverse impact on the pricing of fixed rate mortgages. “The most competitive mortgage rates we monitor have shown no movement for approximately three weeks. The minor increase in swaps has merely brought them back to levels from a few weeks earlier.”
Hollingworth says that market expectations on the timing of future rates cuts will be important in determining fixed rate pricing going forward. “Fixed rates have fallen substantially since last summer but have largely stabilised. With uncertainty still in the air as to how quickly base rate may fall, those holding out for further cuts may find themselves in for a long wait.”
Over 50s lender LiveMore managing director of capital markets Simon Webb says: “Although our current inflation rate remains way off the 2% goal, consumers can take some solace that inflation is largely on the descent this time round, and our economy does appear to be on the mend, slow though that process may be.
“Older borrowers and mortgage prisoners are continuing to feel the squeeze with the continuing high cost of living. People coming off an interest-only mortgage this side of summer will need to make sure they seek sound advice.”
