Inflation eases to 4.6% - what this means for your savings and borrowings

The UK economy has landed a major blow in its fight against inflation. This morning it was confirmed that the consumer prices index (CPI), the UK’s main measure of inflation, slowed to 4.6% in October, its lowest level for two years. This means that Prime Minister Rishi Sunak has met his target to halve inflation by the end of 2023.

This is promising news for savers, investors, and borrowers, who’ve seen their finances battered by price rises since late 2021. We’ve been hit hard at the petrol pumps and the shopping tills, while household costs, such as mortgages, rents, and energy bills have all soared.

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While inflation has been falling throughout the year, it has remained sticky in parts. Price rises unexpectedly nudged back up in February, and held steady at 6.7% in September, despite economists predicting a marginal fall.

October’s 2.1 percentage point inflation drop is largely due to last year’s energy price hike falling off the annual comparison. But that’s not the only reason. Core inflation, which strips out food and utility costs, fell from 6.1% to 5.7%, another encouraging development.

Something, however, we must not overlook is that inflation is still uncomfortably high, which means looser monetary policy may have to wait. At 4.6%, CPI is more than twice as high as the Bank of England’s 2% target.

The UK central bank will monitor inflation’s trajectory closely over the coming months. If prices continue to slow significantly, the prospect of pushing down the base rate will loom into focus.

However, forecasts suggest it may take two years before inflation returns to a level deemed acceptable.

On 3 November, the day after interest rates were held at 5.25% for the second successive time, the Bank said: “We expect inflation to continue to slow, and be back to more normal levels by the end of 2025. By normal, we mean that on average, prices are rising by around 2% a year.”

What will the Bank of England do next?

The Bank’s Monetary Policy Committee (MPC) will meet again on 14 December to decide what to do with interest rates. With inflation now below its 2023 target, failing an unexpected uptick in December, we can expect the base rate to stay the same for the third time on the bounce. This would bring some welcome relief to borrowers, especially those on variable rates and anyone whose fixed-rate deal will soon expire.

However, keeping rates on hold is far from a foregone conclusion, despite the UK economy flirting with recession. Earlier this month, the Bank refused to rule out renewed rate hikes, stressing: “The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

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The UK central bank expects rates to be held at around 5.25% until Q3 2024 and then gradually edge down to 4.25% by the end of 2026.

What does the future hold for savings rates?

According to Moneyfacts, with inflation easing to 4.6%, some standard savings accounts are outpacing price rises for the first time since May 2021. This includes 56 easy-access accounts, 86 notice accounts, 46 variable-rate ISAs, 215 fixed-rate ISAs and 489 fixed-rate bonds.

This is a positive development for savers seeking to protect their cash holdings from the cost-of-living crisis. If you manage to secure the right deal, your savings will no longer be eroding in real terms.

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That said, you may have to hunt around for best rates, possibly veering off the high street with challenger banks offering the most attractive ones. And you might need to act fast as rates have been falling in recent weeks.

The big decision you face is whether to lock in for a fixed period (typically one or two years) which usually pay you more, or keep the money flexible in an easy-access account.

This decision will hinge on whether you might need the money over the next 12 to 24 months. If, for example, you need to fall back on this cash in the event of an emergency, such as your boiler breaking down, you might want to swerve a fixed-term account. That’s because should you need to get your hands on the money for any reason, at best you might lose some interest and at worst be unable to withdraw it. Think carefully and review the account’s T&Cs before signing up.

If you have no need to use or spend the money within the next five years then investing in the stock market might be a better option. The value will move up and down, and you might not get back everything you put in, but it does offer the prospect of higher returns. Five years should offer enough time to ride out any turbulence.

Stocks in the US and the UK rallied this morning after better than expected inflation data on both sides of the Atlantic.

How will this affect borrowers?

To say the past two years have been tough for borrowers is an understatement. Mortgage rates have skyrocketed off the back of rising interest rates, with many households seeing monthly repayments jump hundreds of pounds a month.

As Myron Jobson, interactive investor’s senior personal finance analyst, notes: “The 14 consecutive interest rate hikes to try and get the inflation rate back down to the Bank of England’s 2% target have seen mortgage rates soar to levels not seen before the financial crisis.

“This jarring shift from the low rates status quo has had significant pounds and pence repercussions for many homeowners who have remortgaged this year. Higher mortgage rates have also pushed rents higher, with many landlords passing on the additional cost burden to tenants.”

But with the Bank of England hitting the breaks on rate rises, some green shoots have begun to emerge.

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Mortgage rates have been creeping down over the past few months. Two-year fixed deals dropped below 5% earlier this week – after peaking at almost 6% in July. And this trajectory is set to continue for the final seven weeks 2023, with even cheaper deals expected to hit the market.

If your current deal is due to expire in the next few months, now is the time to do some homework and decide whether a tracker or a fixed rate is right for you.

As a rough guide, if you value certainty with your monthly repayments, a fixed rate might be a smart option. That’s because the interest rate you agree at the outset remains static throughout the term - handy from a budgeting perspective.

With a variable rate or tracker there’s a bit more risk involved. Your repayments can shift either up or down in response to base rate changes. Put simply, if the Bank reduces rates, your mortgage will get cheaper, but it will become more expensive if the base rate hikes again.

It’s therefore wise to consider your options well in advance and choose carefully when the time comes, taking professional advice if you need to.