Inflation fell to its lowest rate for two years in October, and the latest month-on-month drop was slightly larger than anticipated. What does this mean for the mortgage and property market?

Consumer Price Index (CPI) inflation (which relates to goods and services) dropped sharply in October. It went down to 4.6%, compared to 6.7% in September. This time last year, it stood at 11.1%. Economists predicted an inflation drop, but the reduction was slightly more than some anticipated.

Inflation is the price increase of goods and services in the economy over a given time frame. Runaway inflation has been tempered by increasing interest rates. However, the rate at which inflation has fallen has, at times, seemed painfully slow compared to other countries. This significant recent drop is largely because the Ofgem energy price cap was reduced on 1 October.

The Bank of England has increased the base rate over the past 18 months to combat inflation rises. Since December 2021, the rate has increased 14 times, and the current base rate of 5.25% is at a 15-year high.

House move plans on hold

This has resulted in mortgage interest rates going up, which has caused many people to put their moving plans on hold. The reduction in demand has meant that property prices have fallen in the last year. But now that inflation has gone down significantly since it peaked at 11.1% last October, will we see house prices start to go up again? This is unlikely since inflation hasn’t been the sole drag on buyer demand, and rather, it is the medicine used by the Bank of England – to increase interest rates – which is likely having the bigger impact.

The Bank of England has been consistent in its messaging that it will not reduce its base rate until inflation is back under its 2% target. Therefore, it is unlikely that the base rate will come down anytime soon. The Bank is due to review the base rate again on 14 December, and it is expected to remain the same.

Inflation battle not over yet

‘The war against inflation is far from over,’ says MB Associates’ Managing Director, Monica Bradley. ‘The road ahead of us is set to be a long one, and it’ll probably be as challenging to get from 4.6% to the Bank of England’s target of 2% as it has been to bring it down from 11.1% to where we are now.’

However, there is some clear good news for borrowers. Fixed-rate mortgage deals have recently been coming down, and we have seen some lenders offering two-year fixed-rate deals below 5%.

Monica adds: ‘The Bank of England is very likely to hold the base rate where it is for a prolonged period. It’s hard to see fixed-rate pricing move much lower. We’ve finally had some good news over the last few months, but it’ll take some time for interest rates to reduce back to the level where we can have a really buoyant housing market again.’

That said, the mortgage market is predicted to be more stable in 2024, following a very turbulent 15 months. Lenders are competing with each other for business now, but it remains to be seen how long this will last.