Inflation fell further than expected on Wednesday, fuelling hopes that the upward pressure on mortgage rates could begin to ease.
Consumer Prices Index inflation was 7.9 per cent in June, down from 8.7 per cent in May – its lowest level in 15 months, according to Office for National Statistics data.
It said falling fuel prices was the biggest driver behind the drop, while food price inflation also pared back to 17.3 per cent from 18.7 per cent in May, though still painfully high.
Core inflation – which excludes food and energy costs – also dropped by more than expected and was down to 6.9 per cent, having been predicted to stick at 7.1 per cent.
The Bank of England has been raising the base rate in a bid to curb stubbornly high inflation.
But the latest figures sparked hope that rates do not need to climb as high as feared in August and the cost of living crisis could start to alleviate.
Andrew Montlake, from 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.”
Economist at ING James Smith warned it will be a “close call” whether the Bank of England votes for a 0.25 or 0.5 percentage point interest rate rise next month as wage growth is running at its fastest pace in more than 30 years.
He said: “Is this enough to convince the Bank of England to opt for a 25 basis point rate hike in August?
“We think it probably will - but it’s going to be a close call.
“The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply.”
The average two-year fixed-rate homeowner mortgage rate on the market today was 6.81 per cent, up from 6.78 per cent yesterday, according to Moneyfactscompare.co.uk.
The average five-year fixed residential mortgage rate is 6.33 per cent, up from an 6.30 per cent yesterday.
Prime Minister Rishi Sunak today insisted that halving inflation is his “top priority”.
“Inflation drives up the cost of living, it eats into the pounds in your pocket,” he said. “We still have a lot of work to do but we’ll get there if we stick to the plan.”
Chancellor Jeremy Hunt also stressed the need to “stick to the plan” to get inflation under control.
Asked if the decline means the Bank of England should ease up on interest rate hikes, Mr Hunt said: “What we have seen is the Bank has taken very difficult decisions and the Government has taken very difficult decisions in the autumn statement to make sure that we really do start to bring down inflation.
“We are seeing the first fruits of that but there’s a long way to go and we need to remember that families are still feeling a lot of pressure with very high food price inflation.
“Although fuel prices have come down, they’re still significantly higher than they were a few years ago.”
He urged retailers to ensure any falls in costs are passed on to consumers “as quickly as possible because people are feeling a lot of pressure”.
But shadow chancellor Rachel Reeves warned inflation “has been persistently high and remains higher than our international peers”.
“This is becoming a hallmark of Tory economic failure,” she said.
“Today’s numbers confirm what families across the country already know - that prices are still going up at staggering rates and that they’re bearing the brunt of those costs.”
