Bets are back on for an interest rate cut next month after inflation surprised many commentators by dropping to 2.5%.

The Bank of England is set to announce its latest decision on 6 February, with economists now saying a cut from the current rate of 4.75% is more likely.

Surprised

Many experts were surprised by the inflation fall in December from 2.6% the previous month, announced by the Office for National Statistics (ONS) yesterday.

And Stock Market traders are now reported to be saying there is an 85% chance of a base rate reduction to 4.5% in February, according to the Daily Telegraph.

Green light

Adam Deasy, Economist at PwC, said the latest inflation figure “may be the green light” for rate cuts.

“The fall in consumer price inflation could not come at a better time for both the Bank of England and Number 10.”

This development will be welcome news for homeowners with mortgages, who have faced warnings of higher costs this year.

In fact, the average increase in mortgages now tops £1,000 as a result of Chancellor Rachel Reeves’ Budget last year, according to the latest figures.

Analysis by the Telegraph showed that property owners who need to remortgage will face a typical extra amount of £1,019 per month.

Costs reduced

Increased Government borrowing costs heaped pressure on Chancellor Rachel Reeves, as around a quarter raised from tax increases will go on interest payments.

And HMRC figures released last week showed there was a total of 92,640 residential property transactions in November, an 8% drop from the previous month.

But the decrease in inflation means Government borrowing costs will now be reduced.

It’s not all good news though, as some economists warn inflation will shoot up again this year.