UK Inflation Drops to 2.6% – What It Means for Interest Rates & Mortgages

UK inflation has fallen more than expected to 2.6%, according to the latest Office for National Statistics (ONS) data, raising hopes of an imminent Bank of England interest rate cut.

Key Drivers Behind the Inflation Drop

The largest downward contributions came from:

• Recreation & culture
• Motor fuel prices
• Housing & household services

These declines were partially offset by rising clothing costs, but overall, the Consumer Prices Index (CPI) showed a sharper-than-forecasted slowdown.

Impact of Global Trade Wars on UK Inflation

Last week, economists had predicted inflation would hold at 2.8%, but concerns over a global trade war have yet to fully impact the UK economy.

• US President Trump delayed sweeping tariffs on over 60 countries, including the UK, but maintained a 10% baseline tariff.
• China retaliated, raising tariffs on US goods to 125% after the US imposed 145% charges on Chinese imports.

Market analysts warn that these moves could disrupt global trade prices, potentially reigniting inflationary pressures later in 2025.

Will the Bank of England Cut Interest Rates in May?

With inflation now closer to the Bank of England’s 2% target, pressure is mounting for a rate cut at the next Monetary Policy Committee (MPC) meeting on 8 May.

• In March, the Bank held rates at 4.5%, with only one member (Swati Dhingra) voting for a cut.
• Policymakers adopted a “gradual and careful” approach, but weak demand could push for faster rate reductions.

Peter Stimson, Head of Product at MPowered Mortgages, says:
“The Bank no longer has a reason not to cut rates in May. While inflation remains above target, the focus must shift to stimulating the economy amid recession risks.”

What Does This Mean for Mortgage Rates?

Despite expectations of a Bank Rate cut, mortgage pricing depends on swap rates, which forecast future interest movements.

• Swap rates have already fallen since Trump’s tariff announcement, leading some lenders to reduce mortgage rates.
• Markets now predict two more rate cuts in 2025, potentially bringing the base rate below 4% by December.

However, Myron Jobson, Senior Personal Finance Analyst at interactive investor, warns:
“This could be the calm before the storm. Inflation risks remain, and the path back to 2% may still be bumpy.”

Challenges Ahead for UK Households

John Phillips, CEO of Just Mortgages, cautions that new tax changes and price hikes in the new financial year could fuel inflation again.

“Today’s drop is positive, but global trade tensions and domestic pressures mean uncertainty remains high.”

The Bottom Line

• Inflation at 2.6% boosts chances of a May rate cut.
• Mortgage rates may fall further if swap rates continue declining.
• Global trade wars and UK fiscal policies could still push inflation back up.

With the Bank of England’s next decision looming, borrowers and savers should prepare for potential financial shifts in 2025.