Hopes of an imminent Bank of England rate cut have faded after UK inflation rose more sharply than expected in December, pushing expectations for the next move on borrowing costs back to April at the earliest. Investors have effectively ruled out a February cut following the latest data.
The headline inflation rate climbed to 3.4% in December, up from 3.2% in November, marking the first increase since July and coming in slightly above market expectations, according to the Office for National Statistics.
The rise was driven largely by higher tobacco duties introduced after the delayed autumn Budget, with annual tobacco inflation jumping from 4.2% to 6.5%. Alcohol and tobacco prices combined rose 1% month-on-month. Transport costs also added pressure, as air fares surged 28.6% amid festive travel demand.
The figures all but confirm that interest rates will be left unchanged at 3.75% when the Bank’s Monetary Policy Committee meets in early February.
Lorna Hopes, mortgage specialist at the chartered financial advisers Smith & Pinching, commented: “The next wave of mortgage rate cuts has just disappeared over the horizon.
“While the weakness of Britain’s economy – slow growth and stubbornly high unemployment – means the Bank of England is widely expected to reduce its base rate further this year, we’re highly unlikely to see a cut next month.
“Headline inflation is proving sticky, and while December’s increase to 3.4% was not unexpected, it’s still a disappointment. However, the slowing pace of wage growth revealed yesterday means CPI should start to fall in coming months. Lower inflation will give the Bank a freer hand to cut its base rate again.
“January has already been a good month for anyone due to remortgage soon, or planning to buy their first home.
“Most major lenders have trimmed their fixed rates in recent weeks, with the big beasts of the industry starting the new year with a spring in their step and competing hard for business.
“Many borrowers can now get a fixed rate of well under 4%, and there are some eye-catching deals available to some remortgagers and buyers with a big deposit.
“But the chipping away at rates could soon run out of steam as they probably don’t have much further to fall.
“So if you’re one of the thousands of people with a fixed rate mortgage that’s due to expire between now and summer, it’s worth shopping around and talking to a broker as soon as possible.
“You can reserve a new rate up to six months before the end of your current deal, and doing so will ensure you don’t lose out if rates start creeping back up before your current deal ends.”
Peter Stimson, director of mortgages at the lender MPowered, agrees that the prospect of a February base rate cut is fading faster than many people’s New Year gym attendance.
He commented: “At the start of the year it had seemed like a genuine possibility, albeit a modest one.
“As swap rates held steady in the first weeks of January, many of the biggest lenders started 2026 by shaving their fixed interest rates in an effort to steal a march on each other.
“That ratecutting momentum could now stop in its tracks and the great deals we’ve seen in recent days may be short-lived.
“With core CPI unchanged at 3.2% and a material jump in the headline figure to 3.4%, inflation is still stubborn. While the overarching trend is downward, the timing is proving tricky.
“All things being equal, the Bank of England is likely to push its next base rate cut back to April or June at the earliest.
“The trouble is, all things aren’t equal. The Greenland crisis is already bleeding into global bond markets and this could muddy the waters further for mortgage rates.
“US Treasury yields have risen by around 14bps in the past three days, and with both the UK and Europe holding a vast amount of US debt, swap rates – and thus mortgage interest rates – could creep back up again in coming days.”
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