Recent mortgage interest rate reductions may be short-lived following an unexpected rise in inflation, which led to an increase in swap rates.
Swap rates are the interest rates lenders pay to financial institutions to secure fixed-rate funds. When swap rates fall, lenders can offer lower fixed mortgage rates to customers.
However, today’s Consumer Prices Index (CPI) report showed inflation rose by 3% in the 12 months to January 2025, up from 2.5% in December 2024.
This increase was significantly higher than expected, causing swap rates – which had declined after the Bank of England’s decision to lower central interest rates last week – to rise.
Over the past week, lenders have been slashing rates and launching some of the lowest-interest deals in months – some sub 4%. However, mortgage experts warn that these attractive offers could soon be withdrawn as lenders adjust to the market shift.
Harps Garcha, director at Brooklyns Financial said: “Wednesday’s unexpected rise in inflation has tempered predicted base rate cuts in 2025. With swap rates reacting sharply, recent mortgage rate reductions may be short-lived.
“Those looking to secure new a fixed rate for their mortgage should consider acting sooner rather than later before lenders adjust rates in response to the shifting market.”
Justin Moy, managing director at EHF Mortgages said: “Some movement in swap rates was inevitable given that the chances of further base rate cuts have reduced with Wednesday’s jump in inflation.”
Mr Moy said it could be “likely” that rates will continue to fall over the coming months, but at a slower rate or just postponed until much later in the year.
He added: “The Bank of England will struggle to justify to itself base rate cuts whilst inflation continues to increase, as the effect of the Autumn budget starts to kick in over the next few months. The Chancellor has a self-inflicted wound with no dressing to help it heal.”
Babek Ismayil, founder at OneDome said: “Lenders have been competing quite aggressively on rates but the cuts may well be reversed if the current upwards trajectory in swaps continues. This is not the news borrowers wanted to hear.”
In response to the inflation news, Chancellor Rachel Reeves said her “number one mission” was getting “more pounds in pockets” after the ONS confirmed the rise in inflation.
She said: “That’s why we’re going further and faster to deliver economic growth.”
“By taking on the blockers to get Britain building again, investing to rebuild our roads, rail and energy infrastructure and ripping up unnecessary regulation, we will kick-start growth, secure well-paid jobs and get more pounds in pockets.”
