A sudden decrease in inflation may lead to more affordable mortgage options for homeowners by summertime.

The rate of inflation in the UK has declined to 3.4 percent, the lowest it has been in over two and a half years. This has increased optimism that the Bank of England may consider reducing interest rates in the summer.

Reworded: The unexpected decrease in inflation is a great success for Rishi Sunak, as he had promised to lower it as one of his main economic goals. Bringing inflation down to 2 percent is also a crucial objective for the Bank.

According to data published by the Office for National Statistics (ONS) on Wednesday, inflation stood at 3.4% in February, slightly below the 3.5% forecasted by economists.

This marks the most minimal level of inflation seen since September 2021. While inflation has decreased, it does not signify a decrease in prices, but rather a slower increase in prices.

In other developments:

The most recent statistics are gradually approaching the Bank of England’s desired inflation goal of 2%. This news comes just before the upcoming interest rate determination on Thursday.

The majority of financial markets believe that policymakers will maintain interest rates at 5.25%. However, the recent decrease in inflation raises the likelihood of a cut in the upcoming summer months. This would positively impact homeowners with loans.

According to Mr. Hunt, the inflation rate creates an opportunity for the BoE to decrease interest rates.

He said: “Families today will heave a sigh of relief that we are firmly on track to bring inflation down to its target of 2 per cent. This is the lowest headline rate for two and a half years.

Food inflation, which was at a high of almost 20% a year ago, has significantly dropped to only 5%, which is a positive development.

In simpler terms, Mr. Hunt stated that when inflation approaches its desired level, the Bank of England may lower interest rates and subsequently decrease mortgage rates, which can have a significant impact.

In February, the rate of increase for food prices dropped to 5 percent, a decrease from the 7 percent seen in the previous month. There was a slight 0.2 percent increase in food inflation compared to January, but it was significantly lower than the sharp increases observed in the same period last year.

According to Paul Dales, the lead economist for Capital Economics in the UK, the February CPI inflation drop from 4% to 3.4% is more significant than anticipated and is unlikely to change the Bank of England’s stance on leaving interest rates at 5.25% tomorrow.

“Our prediction that inflation will drop below 2 percent in April and gradually decrease to 1 percent indicates that the BoE may be compelled to initiate interest rate cuts during the summer and potentially lower them to 3 percent by next year.”

As an approximate example, if a borrower has a mortgage of £200,000 for 25 years at a 5.25% interest rate, their average monthly payment would be approximately £1,200. If the Bank of England reduces rates to 3% this year, the monthly payment would decrease to about £950, resulting in a savings of about £250 per month for mortgage holders.

Savings for mortgage holders in the upcoming year are significantly higher compared to those who rent. Renters have experienced the largest growth in expenses in history due to limited housing availability and rising interest rates.

According to the Office for National Statistics (ONS), the average rent in the UK rose by 9% in the past 12 months, up from 8.5% in January.

This marks the biggest yearly increase since the UK began recording data in January 2015. Generation Rent’s CEO, Ben Twomey, stated that the new rental statistics are “disturbing but expected.”

He stated, “We have experienced the effects of exorbitant rental prices and unmanageable rent hikes since 2021, and we have reached our financial limit.”

“As the apparent relief of the cost of living crisis unfolds, the growing issue of the rental cost crisis persists at a steady rate.”

According to Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research, the decrease in inflation could indicate that the MPC may begin reducing interest rates in the near future. However, it is not expected that there will be any changes at tomorrow’s meeting.

Yael Selfin, Chief Economist at KPMG UK, said: “The Bank of England could opt for a wait-and-see approach at the next meeting, particularly with risks still skewed to the upside. More data and further easing of underlying inflationary pressures could give the policymakers confidence that inflation is sustainably back on target for the long term.

Despite this, we anticipate that inflation will fall below the target of 2 percent for a large portion of the latter half of the year. This will likely enable the Bank to commence a gradual reduction of interest rates starting in the summer, resulting in a total decrease of 100 basis points by the end of the year.

The Office for National Statistics stated that it has not observed any indication of the Red Sea conflict affecting consumer prices at this time. This comes after cargo ships passing through the trade route have been targeted by Houthi rebels in recent months.

According to Grant Fitzner, the head economist at the ONS, the drop in prices was primarily influenced by food costs, which have remained relatively stable this year compared to a significant increase last year. Additionally, price increases in restaurants and cafes have also slowed down.

“These falls were only partially offset by price rises at the pump and a further increase in rental costs.”

Source: independent.co.uk