Inflation eased to 3% in the latest data release, strengthening expectations of a base rate cut next month and prompting fresh debate over the outlook for mortgages and savings.

Figures published by the Office for National Statistics at 07.00 this morning show the headline rate of inflation fell to 3%, reversing December’s unexpected uptick and adding weight to calls for monetary easing.

The data has prompted renewed scrutiny of the Bank of England’s recent forecasting record, with lenders and technology providers suggesting a shift in policy may now be justified.

Kris Brewster, director of retail banking at LHV Bank, said: “Since 2021, the Bank of England has badly let down UK consumers, failing to keep inflation in check. But could this be about to change with today’s drop?

“Despite January’s Bank of England review, citing volatility and poor oversight for years of forecasting mistakes, the conclusion is clear – the Bank keeps getting inflation wrong. And it’s the UK consumer who pays, with mortgage borrowers suffering a cost of living crisis while savers have watched returns on their cash fade with every cut to Base Rate.

“Today’s news makes the case for a March Base Rate cut clearer, and with signs of confidence in the mortgage and housing markets, we expect to see mortgage lenders price more keenly as the fight for customers heats up.

“On the flip side, expect to see savings rates slide further. Savers holding cash in a low-paying savings account will see their spending power come under fire.

“This is not a time for inertia or misplaced loyalty to 0% interest accounts. Savers need to act now to secure their cash.”

Brewster argued that a reduction in the base rate would intensify competition among mortgage lenders, particularly as confidence begins to return to the housing market. However, he warned that lower rates would almost certainly feed through to reduced savings returns, putting further pressure on households holding cash in easy-access accounts.

MARKET AND POLICY OUTLOOK

Richard Pike, chief sales and marketing officer at Phoebus Software, said: “After December’s surprise hike in inflation, today’s news that inflationary pressures have eased again will come as a welcome relief for households, although with wage growth stagnant, people won’t be feeling much better off.

“With joblessness rising and wage growth falling, the Bank of England has an important decision to make at its next meeting about whether to use monetary policy to give the country an economic boost.

“There’s a strong case now for a base rate reduction in March, which would help millions of homeowners and stimulate the property market, helping to drive much-needed growth.”

Emma Hollingworth, chief distribution officer of LSL Financial Services, added: “A reading of 3% this morning is good news, not least as it shows December’s uptick in inflation has not carried forward into the new year and progress back towards 2% is regaining momentum.

“That may soften the stance of the more hawkish members of the Monetary Policy Committee (MPC) when it next meets in March – the MPC’s 5–4 split earlier this month underlined how finely balanced the outlook already has been.

“This morning’s data now strengthens the case for a cut to base rate, although the Bank of England is still likely to want to see sustained evidence that inflation is moving convincingly back towards target before adjusting policy.

“With markets having anticipated a move lower, today’s reading is likely to reinforce existing expectations around the direction of interest rates rather than dramatically alter them. Even so, incremental shifts in confidence can filter through to mortgage pricing over time. Lenders are likely to remain measured in their response, adjusting pricing cautiously while continuing to reflect the broader inflation and funding environment.

“For mortgage advisers, early engagement with customers remains crucial in this environment. With many borrowers approaching the end of fixed-rate deals this year, timely conversations and considered advice will be key to securing the best possible outcomes for those customers.”