Sticky inflation means mortgage rate hikes are more likely to stay

Worrying inflation data will reinforce market expectations that the Bank will need to raise interest rates higher and for longer, which are driving the increase in mortgage rates, the Resolution Foundation said today (Wednesday).

Inflation data in May was once again above market expectations. Headline CPI was 8.7 per cent, well above market expectations of a fall to 8.4 per cent, while core inflation was 7.1 per cent (against a market expectation of 6.8 per cent).

Most worrying of all was services inflation – the Bank of England’s preferred measure of domestically driven price pressures – which jumped from 6.9 to 7.4 per cent in May. This was well above the Bank’s May forecast of 6.8 per cent, and the highest such reading since 1992.

This data will reinforce market expectations pushing up families’ mortgage payments as they come off fixed-rate deals. Recent Resolution research found that repayments are set to rise by £15.8 billion a year by 2026, with households having to re-mortgage next year facing an additional mortgage hit of £2,900 on average.

The Foundation adds that those hardest hit by rising prices are likely to be different to those hit hardest by rising interest and mortgage rates. Inflation rates for the poorest tenth of households are 25 per cent higher than those for the richest tenth of households as they spend more of their income on food and energy bills.

In contrast, higher mortgage repayments are more likely to hit higher income families. Three-quarters of the possible £15.8 billion increase in mortgage repayments by 2026 will be borne by the richest 40 per cent of households, according to Resolution Foundation analysis.

James Smith, Research Director at the Resolution Foundation, said:

“Sticky inflation is extending the cost-of-living crisis for everyone in Britain, and hardening the mortgage crunch for the seven million households who have a mortgage.

“The latest data will reinforce market expectations of how high interest rates will go, and put more pressure on the Bank. This is bad news for anyone with a mortgage, who will be looking out for more positive signals before their current deal comes to an end.”