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  • Writer's pictureCharlotte Oakley

Making sense of falling inflation: What you need to know.

Updated: Feb 15

The UK's annual inflation rate is as a critical metric, influencing everything from daily expenses to long-term financial decisions. 

Inflation has a wide-ranging impact on various aspects of our lives, from our weekly shopping expenses to our daily commute. 

One area where its influence is particularly significant is interest rates, a factor that resonates with both savers and borrowers. 

Whether you have savings in a bank account or are seeking a loan to enhance your finances, inflation plays a role. Read on to understand how inflation can have implications for the rates you are offered.

Understanding the Basics:

The annual inflation rate in the UK is determined once a year by comparing the prices of everyday goods and services from the previous year.

This metric, usually calculated by institutions such as the Office for National Statistics (ONS), profoundly impacts various aspects of daily life, including the cost of living and transportation. 

However, one of its most significant repercussions is felt in interest rates.

Inflation's Ripple Effect on Interest Rates:

Inflation occurs when the costs of everyday goods and services rise, leading to an increase in the overall price level. 

For example, if the UK's annual inflation rate rises by 2%, on average, the prices of the goods you purchase will be 2% higher than the previous year. This upward trend in prices has a cascading effect on interest rates.

Interest rates are expressed as a percentage and can be applied in two ways:

Money owed: When you take out a loan, the interest rate represents the amount you need to repay on top of the borrowed money.

Money saved: If you have funds in a bank account, your interest rate is a percentage of the money saved, and you earn it back from the bank.

Interest Rates and Inflation:

When inflation goes up, the base rate and interest rates also tend to increase.

The Bank of England's base rate, a key determinant of interest rates in the UK, is adjusted periodically based on inflation and economic conditions.

For borrowers, fluctuations in the base rate can significantly impact the interest rates offered. 

A decrease in the base rate may lead to lower interest rates on loans, translating to savings on monthly repayments. While an increase in the base rate can lead to higher borrowing costs, making it difficult to afford large loans.

Mortgage Market Dynamics:

For those navigating the mortgage market, understanding the connection between falling inflation and interest rates is crucial. 

Mortgage deals, influenced by these economic factors, can be more favourable during periods of low inflation and corresponding low interest rates. As the base rate fluctuates, so too do the opportunities for mortgages with beneficial terms.

The Mortgage Application Process:

When applying for a mortgage, the interest rate offered is influenced by various factors, including credit score and the required loan amount. 

However, the economic conditions, particularly inflation and the base rate set by the Bank of England, also play a key role. 

A borrower's financial situation and the advice of a mortgage broker become crucial elements in this process.

Fixed Interest Rates and Considerations:

If you already have a loan with a fixed interest rate, the impact of changing interest rates may differ. 

While an increase in interest rates won't affect your monthly repayments, it can influence your overall financial strategy. 

On the other hand, a decrease in interest rates may not translate to reduced monthly payments for those with fixed-rate loans.

Making Sense of Falling Inflation with Your Mortgage Room

Making sense of falling inflation requires a comprehensive understanding of its implications on interest rates and mortgage deals. 

As the Bank of England monitors economic conditions and adjusts its base rate, consumers must stay informed to make informed financial decisions. 

Whether you're a saver or a borrower, understanding how inflation and interest rates intersect can impact your finances whether you're saving or borrowing.

Consulting with mortgage advisers, such as Your Mortgage Room, and staying on top of market trends will help you to understand this ever-changing market and make the most of the opportunities presented by falling inflation.

Your home may be repossessed if you do not keep up with your repayments

There may be a fee for mortgage advice. The precise amount will depend upon your circumstances but will be agreed with you before proceeding.


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