Inflation soars to record high – is a rate rise on the horizon?

Inflation soars to record high – is a rate rise on the horizon?
Inflation jumped to 4.2% in the year to October, up from 3.1% the previous month, with the Bank of England under mounting pressure to raise the base rate next month to help curb rising living costs.

The Consumer Prices Index (CPI) measure of inflation is now more than double the government’s 2% target, having reached its highest level for nearly a decade.

Here, we explain what inflation is, how it can affect interest rates, and what it could mean for your mortgage.

What is inflation?

Inflation is essentially the rate at which living costs are increasing.

The recent surge in the cost of living is due to soaring energy bills and fuel costs, along with an increase in the price of used cars and other goods. The lifting of the energy price cap meant that gas bills jumped by 28.1% in the year to October, with electricity costs up 18.8%.

How does inflation affect interest rates?

The Bank’s Monetary Policy Committee voted to leave the base rate unchanged at 0.1% in November, but the hike in inflation in the year to October, along with predictions that it will reach 5% next Spring, mean that a rate rise next month is looking increasingly likely.

Raising rates makes the cost of borrowing more expensive, reducing consumer demand for goods and services and helping take the steam out of rising prices. It also makes saving more appealing, as savers can earn higher rates of interest on money held in savings accounts.

What higher interest rates would mean for your mortgage

If you are tied into a fixed rate mortgage deal, your monthly payments won’t change if interest rates rise. However, it’s worth bearing in mind that when your current deal ends, you could face steeper costs when you come to remortgage.

If you have a variable rate mortgage, such as a tracker deal which follows movements in the Bank of England base rate, your monthly costs are likely to increase if interest rates go up. If you’re worried about how you’d cope with higher payments, you might want to consider locking into a fixed rate mortgage sooner rather than later. Make sure you check that you won’t have to pay any Early Repayment Charges to leave your existing deal first, or if you do, that the savings you’ll make by moving to a new deal outweigh these. Our calculator can help you crunch the numbers.

There are still plenty of competitive fixed mortgage deals available, but the best mortgage rates don’t tend to hang around for long, so seek expert advice if you need help choosing the right deal to suit your needs.

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