- CPI inflation fell very slightly to 2.6% in June – but bad news is waiting in the wings (source: Consumer price inflation, UK - Office for National Statistics)
- Higher inflation expectations mean the market is currently pricing in one interest rate rise in September and another in February next year
- What this means for savings and mortgages
Sarah Coles, head of personal finance at AJ Bell, comments:
“June’s inflation figure is a bit of a crowd-pleaser, but there’s bad news lurking in the wings.
“Inflation fell very slightly in June, as the Iran peace agreement brought oil prices lower during the month, easing costs at the pump. Unfortunately, the fragility of the deal has seen this trend go into reverse in July, so this is likely to be a relatively short-lived phenomenon. It’s also set to be exacerbated by the energy price cap hike at the start of this month, so the pain of inflation is far from over.
What this means for savers and borrowers
“There could be a silver lining for savers, because the market is convinced that the Bank of England may need to raise interest rates to fight inflation, which tends to support savings rates. The markets are still only expecting a single rate hike by the end of 2026, but it’s expected to hit in September, with another potentially following in February.
“When rate expectations rise, swap rates rise, so fixed savings rates tend to do so too. However, the savings market moves slowly, and the shift in expectations has been relatively recent, so we’re yet to see much movement. Rates are robust though, offering 4.9% if you fix for one year, 4.85% if you fix for three, and 4.93% over five. The market is also particularly competitive right now, with an unusual number of banks jostling for market share. It means the most generous rates are likely to edge up. If you’re in the market for a new savings account, it’s worth keeping your eye open for a bargain and acting fast while it lasts.
“On the flip side, the fact that rates might rise is linked to fears of higher inflation, which can eat away at the spending power of savings. It means that if you have some cash that you won’t need for five to 10 years or more, investing that money should be on the radar. Over the short term it will rise and fall in value with the markets, but over the long term it stands a better chance of hanging onto its buying power and beating inflation than cash savings.
“There’s miserable news for anyone in the market for a new mortgage. Mortgage rates had been falling across the board, but this week has seen them jump significantly, as the markets began to expect earlier rate rises, and swap markets started to price them in.
“This demonstrates how difficult it can be to second-guess where the mortgage market is heading at a time of such uncertainty. It’s also why it’s not worth hanging on for rates to hit a magic number, even if the market has been moving in one direction for a while. Instead, if you have a remortgage due in the next six months, check if you can agree a deal for your remortgage now. If rates fall from here, you can shop around elsewhere, but if they rise again, you’ll have locked in a competitive rate.”
