- Inflation is likely to rise again when figures are released next week.
- The market is still pricing in a decent chance of a February cut – and at least two cuts in 2025.
- What this means for savings and mortgages.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“Headline CPI inflation is expected to continue to rise slightly, continuing the unwelcome trend we’ve seen since October.
Prices at the pumps ticked higher over the month, while food price inflation jumped to 3.7% in December, the highest level since March. Even though the economy has been stagnating and going into reverse in recent months, wage growth is still running hot. The annual growth in private sector regular average weekly earnings rose to 5.4% in the three months to October, which is likely to keep prices charged by companies higher.
The months ahead are fraught with uncertainty about just how companies will deal with the higher rate of National Insurance contributions they’ll have to pay this year. Some big retailers have already said prices will go up, but there is a chance others will also limit wage increases to offset the extra costs.
The threat of tariffs being imposed by the incoming Trump administration has receded a little. The risk is that this could push up the value of the dollar and raise the price of imports. However, sources close to Trump have indicated that they may be highly targeted on ‘critical sectors’ and may have a more minimal effect. The UK also trades more in services with the US, which is likely to mean it’s more insulated from any repercussions.
When it comes to decisions on interest rates, even though inflation is still set to veer further away from target, policymakers will have an eye on the struggling economy, so they’re not going to want to push rate cuts too far down the track. Although infrastructure investment is expected to buoy growth, highly cautious companies, worried about increases in tax, could limit investment. So, it still seems likely that the Bank of England will vote for at least two interest rate cuts over the year, with a 66% probability of a cut in February being priced in by financial markets.”
What this means for savings and mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Rising inflation wasn’t on anyone’s Christmas list, but there’s a decent chance that Santa delivered it in December regardless. On the plus side, it’s still a long way shy of the soaring inflation rates we faced two years ago, and while it’s set to bust the target for a considerable period, we won’t be back to the bad old days of breaking out in a cold sweat at the supermarket tills.
It means the market is currently erring on the side of an early rate cut in 2025, but for there only to be a couple of cuts through the entire year. This is by no means nailed on. If we get an easing in wage inflation, signs of trouble brewing in the employment market, or more dramatically miserable growth figures, it will pile on the pressure for more cuts. But right now, the market expectations seem reasonable.
This is likely to be good news for savers, who can still get strong deals across the board. Thanks to strong competition in the easy access market, you can get up to 5% at the moment – including a six-month bonus. Even without that, you can make 4.85%, which is far more than had been predicted by this stage. If your provider has cut its rate, it’s a reminder that there are still decent deals on offer, so it pays to vote with your feet and switch to an online bank or savings platform where you tend to get more competitive deals.
Fixed rate account have also held up impressively, so much so that the gap between easy access and fixed rates is closing. We can expect easy access rates to drop behind fixed rates in the coming weeks, and for the market to normalise. However, this will be against a backdrop of rates that gradually trend downwards, so if you have money you’re planning to fix for a period, don’t hang about: take advantage of these rates while they’re still around.
Higher inflation isn’t great news for mortgage borrowers, but it’s unlikely to heap significantly more misery on them either, because this is largely priced into current deals. Because the two-year fixed rate market is relatively reactive to inflation data, it may rise from its current position, just under 5.5%, to a point just over it, but it’s not going to transform the mortgage landscape. This is what it has been doing for a couple of months now. Variable rate borrowers, meanwhile, still have the hope of a rate cut in February, but recent experience will tell them not to get carried away with optimism.
It means it’s still going to be key to shop around for a decent deal when remortgaging, and negotiate on the asking price when buying. It also means buyers still need all the help they can get – whether it’s from the Bank of Mum and Dad or the bonus from a Lifetime ISA
