Mortgage rates could face further upward pressure after UK inflation climbed back above 3% in August.

The Consumer Prices Index rose by 3.1% in the 12 months to August, up from 2.9% in July, according to the Office for National Statistics.

Inflation including owner occupiers’ housing costs also increased, with CPIH rising from 3.1% to 3.3%.

Transport costs, particularly motor fuels, made the largest upward contribution to the increase, while core CPI remained unchanged at 2.6%.

RATE PRESSURE

The figures come amid renewed upward pressure on fixed mortgage rates, with lenders repricing as funding costs have increased.

David Hollingworth (main picture, inset), Associate Director at L&C Mortgages, said the rise in inflation had been expected by markets but would nevertheless add to concerns over the direction of interest rates.

He said: “That won’t stop the increase putting more pressure on households and furthering expectation that interest rates will need to head higher. That’s a far cry from the forecast at the beginning of the year, when borrowers were looking forward to further cuts in interest rates over the course of the year.

“Markets are becoming increasingly sensitive to signs that inflation could prove more stubborn than expected, particularly given ongoing geopolitical uncertainty and higher fuel and energy prices. Consequently, homeowners have had to come to terms with higher mortgage rates and a less favourable mortgage market than just a few months ago.”

LENDERS REPRICE

Hollingworth said the latest market volatility was already feeding through into fixed mortgage pricing.

He added: “In fact, the latest round of volatility is sending fixed mortgage rates higher, with a growing number of lenders increasing their fixed rates as funding costs have shot up. As lenders respond to rising swap rates, it’s translating into higher costs for those looking to buy a home or remortgage.

“Jittery markets could mean further tremors for mortgage rates, and several lenders are already hiking rates for the second time in as many weeks. As things stand, borrowers should expect mortgage rates to remain under upward pressure in the near term.

“Recent weeks have been a reminder of just how quickly mortgage pricing can change when market sentiment shifts.”

Neil Rudge, Chief Banking Officer at Shawbrook, added: “When inflation ticks up, the conversation rightly turns to households.

“But there is another group that barely gets a mention. Medium-sized businesses are the shock absorbers of the UK economy, absorbing higher input costs while trying to limit the impact on their customers and employees. That often means tighter margins, delayed investment and harder choices.

“If inflationary pressure persists, it is this critical middle that will quietly carry much of the load. Their contribution, and the trade-offs they are making, deserve far more attention than they currently receive.”