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Surprise inflation rise to 4% – what’s next for markets, savings and mortgages?

What does a surprise rise in inflation mean for markets, savings, and mortgages?

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Frustration is in the air as UK inflation stays stubborn. The slight rise in the headline rate to 4% is the last move anyone wanted to see, pushing the prospect of interest rate cuts further down the line.

There had been hopes that drops in energy prices and food inflation in December would keep the price spiral going.

But, rises in tobacco prices because of duty increases helped push the headline rate back up. It’s still double the Bank of England’s (BoE) 2% target, so monetary policymakers will probably stay ultra cautious about the prospects for rate cuts this year.

There are also concerns that tensions in the Middle East could fan the flames of inflation. There are supply chain jams, leading to concerns about stock delays and potential price increases. This is because ships are actively avoiding the Red Sea, after a series of attacks. Retaliatory airstrikes on targets in Yemen also saw oil prices climbing. Central bank policymakers are keeping a close eye on events.

On the brighter side, the latest economic data is encouraging, including a snapshot from the ONS showing falling job vacancies. Meanwhile, crude prices also kept dropping in December, and supermarket price rises slowed at their fastest rate ever from 9.1% to 6.7%.

The BoE isn’t expecting inflation to reach 2% until the end of 2025. So, policymakers have flagged that interest rates might need to stay higher for longer. With the World Bank expecting global growth to slow, and the UK economy at the edge of recession, this might be even more of a drag on demand.

Even with concerns, markets are still expecting inflation to fall further in the months to come. So, even though cuts are being eyed in 2024, this isn’t guaranteed, and more patience will be needed.

This article isn’t personal advice. If you’re not sure if something is right for you, ask for financial advice.

What’s inflation doing to savings?

The savings market had already reacted to expectations of lower inflation and possible rate cuts from the BoE. You can still get more than 5% on some one- or two-year fixed rates, but longer-term rates have already dropped below this.

The best five-year fixed term is only just over 4.5%, and less than a quarter of available one-year fixed rates are paying 5% or more, none of which are offered by high street banks. So, there could be a time limit on how long savers will be able to grab one of these deals.

This surprise rise in inflation could force a slight rethink on when those rate reductions are likely to come, and we could see a pause in savings rate cuts – or even some better deals.

Combining this with falling mortgage rates, and banks and building societies will be keeping a close eye on their net interest margin.

Is this the last chance to lock in higher rates?

What does inflation mean for mortgages?

This bounce in inflation isn’t a massive movement and not dramatically different to the forecasts. But it’s a surprise, and the markets don’t usually like surprises. It’s still a reminder that inflation will likely head downwards from here, but not particularly fast.

Despite the surprise inflation increase, we’ve seen some chunky cuts across the mortgage market – including the high street giants. This is because future expectations for lower inflation figures are baked into the mortgage market.

This and the assumption that lower inflation could’ve seen the BoE cutting rates as early as April and continue cutting several more times through 2024. This might not be the case anymore and could be pushed back a little.

The surprise rise in inflation could mean we get a pause in mortgage rate cuts, and there’s a chance some of the better deals could go sooner rather than later. So, if you’re in the market for a fix, it might be worth acting as soon as it makes sense for you.

If inflation does keep climbing, wage inflation stays higher, or supply issues or oil price rises push prices back up, the BoE might be reluctant to cut rates too soon. And this could upset the mortgage market.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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Written by
Susannah Streeter
Susannah Streeter
Head of Money and Markets

Susannah is a key contributor to our content. She follows changes in monetary policy movements and fiscal policies closely to assess the impact on financial markets and economic growth, and has extensive experience in covering technology stocks and the retail sector.

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Article history
Published: 17th January 2024