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July Inflation Figures Show Clear Path for Mortgage Interest Rates

July Inflation Figures Show Clear Path for Mortgage Interest Rates

The ONS has published the inflationary figures for July 2023. We examine how recent inflation has impacted mortgage pricing and explain what today’s news means for mortgage interest rates in the future.

Ahead of next month’s Monetary Policy Committee (MPC) meeting, the ONS has published the July inflationary figures. These figures will be a barometer for the MPC as they review the Base Rate. Today’s figures show that inflation reached 6.8 in July, down from 7.9% in June.

The government sets the Bank of England a target of 2% for inflation. The Bank of England, or the MPC, uses the Base Rate to curb rising inflation.

The MPC has increased the Base Rate fourteen consecutive times, rising from an all-time low of 0.1% in December 2021 to 5.25% following this month’s increase. The consensus from industry experts is that we can expect to see one last 0.25% rise to the Base Rate next month. However, inflation affects much more than just the Base Rate. Below, we discuss how inflation has impacted the UK money markets so far this year and how this will impact your mortgage interest rates in the coming months.


A look back at Inflation

Today’s Consumer Price Index (CPI) figures reflect the annual inflation rate for July, which is defined as the change in average prices compared to the same month last year. As such, a lower yearly inflation rate does not mean prices are falling, but rather that prices are not rising as quickly.

Inflation peaked last October, around the time of the failed Truss-Kwarteng mini-budget, at a startling 11.1%. Jeremy Hunt’s quick amendments to the budget helped inflation and mortgage interest rates ease slightly, regaining some confidence in the money markets.

In June, we saw an unexpectedly significant drop in inflation, down from 8.7% in May to 7.9%. This is the lowest inflation has been since March 2022. The fall was mainly driven by the RAC’s reports of decreasing fuel prices. Despite this fall in inflation, continued high growth in prices and earnings led to the Bank of England Base Rate rise we saw this month.


Predictions for inflation and the Base Rate

Further falls to the overall inflation rate are expected for the rest of 2023, which the Governor of the Bank of England has said will primarily be due to falling energy prices. Many economists forecast that inflation could fall as low as 5% in the final quarter of this year.

Source: Pantheon

Despite this easing, we still expect the Bank of England to increase the Base Rate in September by a further 0.25%. So long as inflation continues the same downward trajectory, this should be the final increase this year. It’s unlikely, however, that we will see the Base Rate decrease until late 2024 at the earliest. 


How will July inflation figures impact your mortgage?

As the markets overwhelmingly expect a further rise to the Base Rate and have priced accordingly, it’s unlikely that we will see much movement in SWAP rate pricing.

SWAP rates are what lenders pay to other financial institutions to acquire fixed funding for a set period of time. As such, SWAP rates rather than the Base Rate will impact fixed mortgage interest rate pricing. Again, as the money markets are stable and anticipate the further Base Rate rise next month, it’s unlikely that we will see a significant jump in mortgage rates ahead or following the increase. In fact, based on the positive inflation news, we may see some small reductions in pricing.


When is the next Base Rate meeting?

The MPC meet again on Thursday, the 21st of September, to review money market activity and inflation data. As mentioned, it’s highly anticipated that the Bank of England will vote to increase the Base Rate by a further 0.25 basis points at this meeting.

If you are on a tracker or variable mortgage that follows the Base Rate, you have time to secure a fixed-rate deal before the next MPC meeting. If you wait, you will see your mortgage repayments increase once again following the Base Rate rise. It’s worth exploring your fixed-rate options with a broker to see how much you could save on your monthly payments. 

If you’re approaching your remortgage, the Base Rate rise won’t impact fixed-rate pricing, but SWAP rate pricing will. Whilst inflation is expected to ease, we recommend securing a new rate as early as possible; for some lenders, this can be up to six months before the end of your Early Repayment Charge (ERC) period. If mortgage interest rates decrease, many lenders allow you to switch to a more competitive product should one become available before you complete. Either way, you’ll have financial security and confidence that you’re on the most suitable mortgage for your circumstances.  

To see what rates you could access, speak to one of our expert brokers on 0345 345 6788 or submit an enquiry here.