Analysts are predicting inflation will rise again next week in a cost of living blow to Britons. The Office for National Statistics (ONS) will reveal the consumer price index (CPI) rate for the 12 months to December 2024 on January 15, 2025.
Last month, inflation in the UK jumped to 2.6 per cent, continuing a trend seen over various months. However, experts believe interest rate cuts from the Bank of England could be on the horizon. How will another hike to the CPI rate impact savings and mortgages in 2025?
Why is inflation rising?
Based on the latest ONS figures, inflation jumped by 0.1 per cent on monthly basis, compared with a 0.2 per cent drop in November 2023. Notably, the largest contributing factor to this hike in the CPI rate came from transport costs over the 12-month period.
Over the period, there was a large upward effect in Consumer Prices Index including owner occupiers’ housing costs (CPIH) from housing and household services. Core CPIH, not including food, alcohol and tobacco jumped by 4.2 per cent, up from 4.1 per cent the month before.
In comparison, core CPI increased by 3.5 per cent in the 12 months to November 2024, higher than the 3,3 per cent posted in October. Following the Covid pandemic and Russia’s invasion of Ukraine, Britons have been saddled with inflation hiked prices across a variety of sectors and services.
Do you have a money story you’d like to share? Get in touch by emailing money@gbnews.uk.
Inflation is expected to rise once again
GETTY
How will interest rates be impacted?
In recent years, the Bank of England’s Monetary Policy Committee (MPC) has voted to raise the nation’s base rate to as high as 5.25 per cent. This has been part of efforts to rein in inflation.
With the CPI rate falling to around the central bank’s desired target of two per cent, committee members have voted to slash the rate to 4.75 per cent. The Bank has held the rate at this level due to inflationary pressures.
Despite inflation likely to rise next week, analysis from financial services firm Hargreaves Lansdown is predicting an interest rate reduction from the Bank of England by February.
On top of this, economists believe the central bank’s MPC will implement at least two cuts to the base rate in 2025 which will likely impact savers and mortgage holders.
How will savings accounts be impacted?
Savers have benefited from a high base rate with high street banks and building societies offering bolstered interest rates to their customers. As such, any cuts from the Bank of England could see some competitive deals from the market.
However, Sarah Coles, the head of Personal Finance, Hargreaves Lansdown, believes Britons will still have access to high interest savings accounts for the foreseeable future.
She explained: “It means the market is currently erring on the side of an early rate cut in 2025, but for there only to be a couple of cuts through the entire year. This is by no means nailed on. If we get an easing in wage inflation, it will pile on the pressure for more cuts. But right now, the market expectations seem reasonable.
“This is likely to be good news for savers, who can still get strong deals across the board. Thanks to strong competition in the easy access market, you can get up to five per cent at the moment – including a six-month bonus.
“Even without that, you can make 4.85 per cent, which is far more than had been predicted by this stage. Fixed rate account have also held up impressively, so much so that the gap between easy access and fixed rates is closing.
“We can expect easy access rates to drop behind fixed rates in the coming weeks, and for the market to normalise. However, this will be against a backdrop of rates that gradually trend downwards, so if you have money you’re planning to fix for a period, don’t hang about: take advantage of these rates while they’re still around.”
LATEST DEVELOPMENTS:
How will mortgages be impacted?
Borrowers, including those with debt repayments and mortgage deals, have been detrimentally impacted by the decision to raise the base rate in recent years. Despite this, analysts believe the current deals on offer are “largely priced in”.
Coles added: “Higher inflation isn’t great news for mortgage borrowers, but it’s unlikely to heap significantly more misery on them either, because this is largely priced into current deals.
“Because the two-year fixed rate market is relatively reactive to inflation data, it may rise from its current position, just under 5.5 per cent, to a point just over it, but it’s not going to transform the mortgage landscape.
“This is what it has been doing for a couple of months now. Variable rate borrowers, meanwhile, still have the hope of a rate cut in February, but recent experience will tell them not to get carried away with optimism.”
