"The conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too. "
- Lindsay James, investment strategist at Quilter Investors
CPI inflation has fallen from 2.2% in August to 1.7% in September, below the Bank of England's 2% target and below economists' forecasts of 1.9%.
After hitting the Bank of England's 2.0% target in May and June, inflation rose to 2.2% in July and remained static in August.
Core inflation, which rose to 3.6% in August, fell to 3.4% in September, below expectations of 3.4%.
As a result of lower-than-expected inflation, a Bank Rate cut in next month's Monetary Policy Committee meeting is now widely expected, with many economists predicting a second cut to interest rates before the end of the year.
Isaac Stell, investment manager at Wealth Club, commented: “The Bank of England can today breathe a sigh of relief as inflation, at long last, has fallen below its 2% target, vindicating the steady interest rate cut path they have been treading.
"The door has been swung wide open to the possibility of a rate cut at the November meeting, with perhaps a larger than expected cut not entirely off the cards. Andrew Bailey stated this month the BoE could be "a bit more aggressive" if the news on inflation continued to be good. The latest figures would beg the question, how much better does it need to get?
"With headline and core inflation tumbling, the BoE should feel confident about stepping up to the crease at its November meeting. With declining private sector wage growth, falling prices, and a Government focused on tax rises, an easing of the burden for the public will be welcome. Will the BoE play with a straight bat or will they look to go big and swing for the boundary? Today’s numbers suggest they could well do the latter.”
Lindsay James, investment strategist at Quilter Investors, said: “For the first time in more than three years inflation is back below the Bank of England’s 2% target. With inflation falling below this level and the pace of wage growth slowing, the conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too. This will please the government in the run up to the hotly anticipated budget, where we are being repeatedly told tough decisions are to be announced, so any sliver of good economic news will likely be pounced upon."
Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented: "After years of runaway price rises, inflation falling below 2% will come as huge relief to consumer and companies, lifting expectations for further two interest rate cuts this year. The last time inflation was below 2% was in April 2021 as the country had just emerged from the third lockdown and strict social distancing measures were in place, squeezing demand."
Luke Bartholomew, deputy chief economist at abrdn, added: “This is a very encouraging inflation report for the Bank of England. In particular, the sharp fall in services inflation will help reassure policymakers that underlying inflation pressures are fading, even if the headline rate is likely to pick-up again before the end of the year. A 25bps rate cut in November is now effectively a done deal, and this report certainly makes the path to a consecutive cut in December much clearer. However, the Bank will probably want to assess the impact of the Budget before signalling a shift to a more rapid pace of easing.”
Lower inflation may not translate to lower mortgage rates
While inflation is falling and further cuts to Bank Rate are now widely expected, industry experts explained why this will not necessarily equate to lower mortgage rates in the coming months.
Peter Stimson, head of product at MPowered Mortgages, commented: “It’s tempting to regard such a big drop in inflation as the start of open season on cheaper mortgages.
“Since the Governor of the Bank of England said at the start of the month that he was ready to reduce the Base Rate ‘more aggressively’, inflationary pressure has eased significantly and given the Bank a freer hand to cut further and faster.
“With annual wage inflation slipping below 5% for the first time in over two years and consumer inflation now comfortably under the Bank’s 2% target, the stars seem well aligned for the Bank’s Monetary Policy Committee to make another Base Rate cut when it next meets in three weeks’ time.
“There’s just one snag in this rosy picture. The swaps market, which ultimately determines how lenders price their mortgages, has been rising for the past fortnight.
“So much so that one lender is currently offering a mortgage interest rate below the equivalent swap rate. Translation - it’s selling money for less than the wholesale price. Such crazy pricing is clearly unsustainable, but it also reveals the intense competition among lenders to win borrowers’ business.
“Swap rates are determined by a broader range of factors than just the Base Rate, including gilt yields, which have risen sharply amid investor uncertainty about the upcoming Budget.
“So while a November Base Rate cut now looks distinctly possible if not probable, there’s no guarantee it would instantly translate into much cheaper mortgages.”
Mark Michaelides, chief commercial officer at Molo Finance, said: “Now that headline inflation is more or less where it needs to be, stability from here is the key in settling some of the recent swap rate volatility, which in turn will result in more stable mortgage rates. It is worth pointing out, though, that stable mortgage rates do not necessarily equate to low mortgage rates in the sense that we do not expect a return in the near-term to pre-Truss Budget mortgage rates.”
Jonathan Bone, lead mortgage adviser at homeownership site, Better.co.uk, added: "The news that inflation has dipped below the 2% mark may offer a glimmer of hope for homeowners and first-time buyers, suggesting that the Bank of England might soon consider reducing interest rates. However, don’t be lulled into a false sense of security. Unfortunately, mortgage rates are creeping upward again, driven by concerns surrounding the government's upcoming Budget. It’s clear that the days of near-zero rates are behind us, and homeowners must brace themselves for higher repayments for the foreseeable future—much like energy bills that refuse to come down, mortgage rates seem unlikely to ease significantly anytime soon."
