Will stable inflation prompt a rate cut? Or will the Bank stick?

Diverse views have emerged from financial services figures in response to last week’s news that the headline rate of inflation remained at 4.0 per cent.

According to the latest figures from the Office for National Statistics, prices for food and non-alcoholic beverages fell on a monthly basis by 0.4 per cent, marking the first decrease since September 2021. Cheaper bread and cereals helped reduce food inflation. The rate of core inflation also remained static, at 5.1 per cent.

This has prompted some industry figures to suggest a rate cut will be sooner rather than later. 

Ben Thompson, deputy CEO at Mortgage Advice Bureau, says: “Inflation remaining the same will be music to the ears of rate setters at the Bank of England. January’s headline rate had been expected to rise slightly, so this will be seen as good news. Swap rates have been unsettled over the last week, but this reading will fuel more talk of interest rate cuts.

“Inflation is unlikely to fall in a straight line, and as we’ve already seen, there will be ups and downs. However, 2024 is looking to be a more positive year for mortgages. We’ve seen weekly customer volumes close to those of June and July 2023, and with a drop in interest rates potentially coming into view, the outlook is bright for those looking to refinance or get onto the property ladder.”

And an analysis from independent market broker John Charcol says: Mortgage fixed rates hinge on Swaps, which heavily depend on market outlook and sentiment. This [4.0 per cent] announcement is an improvement on market expectations, given recent days have witnessed an upturn in short-term money. Overall, bank rate is anticipated to decrease sooner than initially projected last year now being priced in for June, with no further increases on the horizon.”

However, some believe the Bank of England will be unmoved by the better-than-expected inflation news.

Sarah Coles, head of personal finance at Hargreaves Lansdow, says: “Inflation is expected to dip significantly lower in the months to come, towards the Bank of England’s target in the Spring, when lower wholesale gas prices feed into the figures. That’s not the end of it though, unfortunately, because after hitting the [2.0 per cent] target it’s expected to bounce back, and take a while to drop back again. As a result, the Bank of England has already said it’s not going to cut in a hurry. A surfeit of caution means they won’t cut until lower inflation has bedded in, and we’re a fair way from that.”

And Nicholas Hyett - investment manager at Wealth Club - adds: "The run of disinflationary data points from before Christmas has continued to falter. However, while the disinflationary disco might have stalled  - the UK economy has at least avoided a return to rising inflation that many feared. Unfortunately that leaves rate setters and investors with more questions than answers.

“With inflation still double target a run of steadily falling interest rates, which set stock markets dancing before Christmas, now looks less likely. But a lack of cuts could feed through to higher interest rates in the mortgage market, which had already started to price some cuts in. From the Bank of England's perspective that would have a similar effect to a new series of rate rises (something it's likely to want to avoid given the delicate state of the economy). Increasingly there are no good options for Central Bankers."