What does the fall in inflation mean for borrowers and savers?

A larger-than-expected fall in the rate of consumer price inflation (CPI) last month has led to predictions of further cuts in the Bank of England base rate this year, which would be good news for homeowners.
The rate of CPI fell from 2.2 per cent in the year to August to 1.7 per cent in September. City analysts had predicted a fall to 1.9 per cent, while the Bank of England had forecast a smaller drop to 2.1 per cent.
Bloomberg reported that financial markets are now forecasting cuts to the Bank of England base rate of 0.42 percentage points by the end of the year, up from 0.35 percentage points before the CPI release. Base rate increased 14 times from a record low of 0.1 per cent in December 2021 to 5.25 per cent in August 2023. It was cut to 5 per cent in August this year.
“The conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too,” said Lindsay James from the investment firm Quilter Investors.
Any cuts in Bank rate would mean lower payments for about 1.27 million homeowners who are on variable-rate mortgages.
Market expectations matter for fixed-rate deals too, as they determine what banks have to pay to borrow so they can lend to us. Banks use what are known as swap rates to price their loans, which are based on expectations of where Bank rate will be in the future.
Since the end of September the two-year swap rate has risen from 3.86 per cent to 4.02 per cent on Monday. This is because markets had rowed back on how far interest rates were expected to fall over the next few years. Some lenders, including NatWest, Santander, Co-op Bank and Coventry Building Society increased fixed rates over the last week by up to 0.3 percentage points.
These slightly higher rate expectations brought to a stop the price war between lenders that had driven down fixed mortgage rates over the summer. For example, the lowest two-year fixed rate fell from 4.76 per cent in August to 3.84 per cent at the start of this month but had gone back up to 3.9 per cent this week.
David Hollingworth from the mortgage broker L&C said: “Many lenders have increased rates. But if the better-than-expected inflation figures improve the market outlook for interest rates, it could therefore help to steady mortgage rates.”
Borrowers don’t have to gamble on what this might mean for their mortgage, though. If you have a deal ending in the next six months you could secure one now with a different lender and still take another if something better comes along.
If you want to stick with your lender, which means that you don’t have the hassle of going through affordability checks, you might need to wait a bit longer. Most of the big lenders allow you to lock in with them three or four months before your deal ends, while NatWest gives you six months.
The bigger-than-expected fall in CPI is a double-edged sword for savers. It is good news because it means your returns grow more in real terms. If you opened a savings account paying 5 per cent a year ago and deposited £10,000, the “real” value of your money after inflation would be £10,274 if the rate of CPI was 2.2 per cent. At 1.7 per cent, it would grow to £10,324. But the CPI fall could mean rates will be coming down.
The financial data firm Moneyfacts said 1,731 available savings accounts beat inflation, up from 1,606 last month. You can get a rate of 5 per cent on an easy-access account through the savings app Chip, 5 per cent on a one-year bond from Union Bank of India, with a minimum deposit of £5,000, and 4.6 per cent on a two-year bond with the app-based Atom Bank.
However, these fixed rates could fall as a base rate cut becomes more likely, so the advice would be to secure a deal now. Easy-access and other variable rate deals are likely to stay where they are until Bank rate is actually cut, although they may well remain competitive as firms vie to keep hold of customers’ cash.
Caitlyn Eastell from Moneyfacts said: “It is crucial savers act with haste if they wish to lock into an attractive deal, as base-rate cuts are still forecast this year, meaning banks may be quick to pass on rate reductions. There are very few existing deals paying around 5 per cent, the majority being variable rates which are especially susceptible to rate changes.”
It is important to keep some cash on hand, usually three to six months’ outgoings, in the best-paying easy-access account you can find. Anything else beyond that you could consider fixing into a bond to safeguard your returns.