UK inflation rose last month as official figures revealed yesterday showed a surprise jump in the Consumer Prices Index (CPI) from 3.1 per cent to 3.2 per cent in October.
The CPI measure has been at or above 3 per cent for the whole of 2010 so what impact will this month’s increase have on interest rates and the cost of mortgages?
Last week, we had the inflation report which came out a few days after the Bank of England's Monetary Policy Committee (MPC) left interest rates unchanged at 0.5 per cent. In the report, the Bank’s Governor, Mervyn King, said that inflation was likely to remain high in the short-term, but was forecast to fall back to its 2 per cent target in 2012.
And then today we’ve had the minutes of this month’s MPC meeting, published by the Bank of England. The result of the committee’s vote was the same as last month with just one member, Andrew Sentance, voting to increase rates by 0.25 per cent (as he has done since June).
Although the voting was unchanged, there were some indications that sentiment among the nine Committee members was changing. The minutes noted that “Some Committee members were concerned that recent inflation outturns and the higher near-term profile meant that the risk to inflation expectations was somewhat greater than previously thought” However, having considered various other factors it concluded that “Overall, most members felt that the balance of risks had not altered decisively”.
As far as mortgage rates are concerned, it’s the cost of fixed rate mortgages that could be most affected by all this. This is because fixed rates are heavily influenced by swap rates, which reflect market expectations of future interest rates.
While the Bank of England is suggesting that things are still very much in the balance, if this latest rise in inflation increases expectations of higher interest rates in the near future, then swap rates will rise and this could in turn lead to higher mortgage rates.
Swap rates rose sharply following last week’s inflation report and since the beginning of the month, 2-year swap rates have risen by around 0.2 per cent – 5-year rates have risen by 0.3 per cent.
If you’re buying a home or remortgaging at the moment and are thinking of fixing your mortgage rate, make sure you keep a close eye on the deals on offer. There are some very competitive deals around at the moment, but if swap rates continue to rise, they may not be around for very long.