UK Inflation Drops To 8.7%

by | Wednesday 24th May 2023 | Mortgage News

The Office of National Statistics have sensationally announced that UK inflation has dropped to 8.7%, the first time it has been below double figures in almost a year. So what does this mean for definite? What could it mean for the future? And what does this mean for mortgage rates to come? In this news update we will go through all of these.

What Is UK Inflation?

In the simplest terms possible, inflation is the rate that prices of goods and services in the UK increase. The speed at which prices rise is called the rate of inflation. When the costs of things increases, the spending value of currency reduces and your money can’t get you as much as it once did. If the rate of inflation is high, this means that costs are increasing quickly and this is what the UK is feeling at the moment. In order to bring the rate of inflation down, the Bank of England (The central bank of the United Kingdom) deploys different tactics. Most notably, raising the base rate of the UK.

HSBC have a great explanation of how raising the base rate remedies UK inflation, on their website. They say that when the base rate goes up, interest rates may go up. It then costs more to borrow money, but it also means you can earn more on your savings – so people may be encouraged to borrow less and save more. This reduces demand for certain goods and services, which could slow inflation down. Historically this has been the most tried and proved method for reducing inflation, and this is currently what the Bank of England are implementing. This has meant that things like mortgage interest rates have had to increase significantly over the last 6 to 12 months.

Is UK Inflation Coming Down?

Month on month, the Bank of England have been reviewing the position of inflation in the UK. They have set themselves a goal of reaching 2% inflation however, after a record high 11.1% in October 2022 it has been a difficult task and the bank has had to make several base rate increases in recent months. But, thankfully it looks like inflation is finally coming down and the economy can start to think about breathing a sigh of relief….soon.

The Office of National Statistics (ONS) have announced that they believe UK inflation is now finally below 10% after almost a year of spiralling inflation. They have announced that they believe inflation now sits at around 8.7%. Still 6.5% above the Bank of England’s 2% target, but definitely some good news and a sign that things are heading in the right direction. This good news comes after a rather disheartening announcement earlier in the year that although inflation was dropping, it wasn’t dropping at the rate that the Bank of England had hoped and still remained at 10.1% by March 2023.

What Do We Know For Definite?

Although this is just the research of the ONS and the Bank of England are yet to do their official and formal review of inflation and the base rate, there has definitely been a decrease in inflation. This can be attributed partly to things like the cost of energy bills decreasing over the last month or so, most notably the price of gas which decreased by 1.0% between March and April 2023. electricity prices also decreased by 1.1% over the same period.

Unfortunately several other areas did still see an increase over March and April 2023 such as recreation and culture, alcoholic beverages and tobacco, communication, and transport. For these areas it is still costing consumers much more than they originally did with food and beverage prices still reaching a near 45-year high.

What Could We See In the Future?

It might be wishful thinking, but we believe that we are now firmly on the downward slope with inflation and building up steam. When the Bank of England’s monetary policy committee next meets, we believe that inflation will have officially dropped even further than the 8.7% figure quoted today by the ONS. We then predict that the bank will start to reduce the base rate. Slowly at first, perhaps 0.25% or 0.5% if we are lucky and the general cost of living should start to ease a bit. There probably won’t be any immediate noticeable difference, but if we keep going in this right direction we should see the following.

  • The cost of energy bills going down
  • The cost of food and beverages going down
  • The cost of fuel going down
  • Mortgage interest rates and other lending rates decreasing significantly

What Will Happen With Mortgage Interest Rates

As mortgage professionals, we have all the confidence that interest rates will come down when inflation and the base rate drop down even more. Why do we think this? Aside from the fact that this is the logical thing to happen (base rate goes down, interest rates must come down). It is clear that mortgage lenders are keen to lend, and if they can safely reduce their rates and encourage more borrowers to use their business, they will. Lenders pushed their rates up to 6% and 7%+ when inflation first started to spiral in 2022, however it wasn’t long before lenders realised that they overreacted and started to reduce their rates again.

Even after several months of increasing base rate figures, lenders have done and are still reducing their rates to make their products more attractive and to make borrowing more appealing. Even with the last crushing news of the base rate rising to 4.5% in May 2023, only a few lenders increased their rates with the majority either keeping them the same or reducing their rates still. This new news, when it is officially announced by the Bank of England, will certainly give the lenders a reason to reduce their rates even more. And it has to continue this way if inflation continues to drop closer to the 2% figure. It is unclear at the moment what we can consider as a ‘normal’ mortgage interest rate as the market has fluctuated so much recently, but we wouldn’t be surprised if we start seeing average rate offering of around 3% in the very near future.

Call A Mortgage Advisor To Talk About Interest Rates

If you or anyone you know is interested in getting a new mortgage either now or in the future, please feel free to give us a call at Oportfolio. Our initial mortgage consultations are free of charge and you can find out how much you can potentially borrow and your potential mortgage rate in 10 minutes. Call our team today. We are here to help.

We're Here to Help

If you have any questions about UK mortgage news or or anything you’ve read then please get in touch. We’d love to hear from you.

As featured in

Understanding a Volatile Mortgage Market eBook

Download Our eBook

Join our mailing list and receive a link to our latest ebook, Understanding a Volatile Mortgage Market. 23 pages of practical insights to navigate the unpredictable mortgage landscape.

You Will Receive A Link To Your eBook Shortly!