This is the highest inflation rate in 10 months, and is significantly higher than the Bank of England’s 2% target. as well as being above economists’ forecasts of a rise to 2.8%.
The Office for National Statistics said the rise was driven by airfares, fuel prices, food costs and a large rise in private school fees, due to the recent change in government policy, meaning they are now subject to 20% VAT.
What does it mean for rates?
This higher-than-expected inflationary rise has raised concerns about future interest rate movements.
The Bank of England’s Monetary Policy Committee recently reduced its base rate to 4.5% to stimulate economic growth, but further cuts may now be less likely in the face of inflationary pressures. Some economists think inflation could climb higher in the coming months as a result of rising energy prices.
What about mortgages?
Rightmove’s mortgage expert Matt Smith said that this morning’s unexpectedly high inflation figure is likely to have a knock-on effect to some of the early momentum we were starting to see in mortgage rates coming down.
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“We’d hoped for a sustained period of gradual falls,”he explained, “but with inflation increasing by 0.2% more than the market expected, we can expect to see a change in that direction.
“Any news which deviates from market forecasts, is likely to cause rates to rise or fall. Over the coming days, the sub-4% rates that had only just started to come out may be the first to go as mortgage lenders re-look at what they can offer home-movers.”
David Hollingworth, associate director at L&C Mortgages, agreed: “Just as last month’s data brought a bit of cheer to the New Year for borrowers it looks like today’s figures could cut any celebration short. 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.
“Today’s 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.
“The lowest fixed rate deals could therefore be short-lived, as we’ve seen strong demand in the early part of the year from borrowers eager to snap up the best deal they can.”
