Hopes raised upward pressure on mortgage rates could start to ease

A bigger-than-expected slowdown in inflation has fuelled hopes that the upward pressure on mortgage rates could start to ease.

Consumer Prices Index (CPI) inflation was 7.9% in June, down from 8.7% in May and its lowest rate since March 2022, according to the Office for National Statistics (ONS).

The Bank of England has been raising the base rate as a tool to quell stubbornly high inflation.

The latest inflation figures will raise hopes that rates do not need to climb as high as feared.

According to Moneyfactscompare.co.uk, the average two-year fixed-rate homeowner mortgage rate on the market on Wednesday is 6.81%, up from 6.78% on Tuesday.

The average five-year fixed residential mortgage rate is 6.33%, up from an 6.30% on Tuesday.

Reprieve

Andrew Montlake, managing director of mortgage brokers Coreco, said: “I suspect we will see a slight reprieve as swap rates (which lenders use to price their mortgages) ease a touch with the prospect that we are now closer to the top of the interest cycle than thought a few weeks ago.

“The Bank of England must now exercise some restraint.”

Mr Montlake added: “Whilst this may not yet mean we see a wholesale fall in mortgage rates, lenders should at least now move away from sudden rate hikes and also enjoy a period of calm reflection.”

Mark Grant, of business finance broker the Business Finance Branch, said: “This better-than-expected data is welcome but may not be good enough to prevent further interest rate rises.”

Martin Beck, chief economic adviser to the EY ITEM Club, said: “Looking ahead, the EY ITEM Club thinks inflation should continue to fall quickly over the rest of this year.”

He added: “Taking today’s data and what it says about the future, the EY ITEM Club thinks another (0.5 percentage point) rise in bank rate next month is now looking unlikely. The EY ITEM Club expects a (0.25 percentage point) increase, with perhaps one more to follow in September, before the rate rise cycle comes to a halt.”