Homeowners have been offered hope that interest rates may not need to rise as high as feared after official figures showed inflation easing back by more than expected in June.

The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) fell to 7.9% last month, down from 8.7% in May and its lowest rate since March 2022, as food price inflation eased and fuel prices dropped sharply year-on-year.

Most economists had expected the figure to fall to 8.2% in June.

Financial markets trimmed their bets on the peak in interest rates to between 5.75% and 6% by the end of the year, having previously forecast 6.25% by next March ahead of the inflation data, which sent the pound nearly 1% lower against the US dollar and euro.

It gives a glimmer of hope for under-pressure mortgage borrowers, who have seen rates on fixed deals soar to 15-year highs in recent months.

According to Moneyfactscompare.co.uk, the average two-year fixed-rate homeowner mortgage rate on the market is 6.81%, up from 6.78% on Tuesday.

The Bank of England is still expected to raise interest rates – currently at 5% – at its next meeting on August 3 as it battles to bring inflation back to its 2% goal.

Experts said the bigger-than-expected fall in inflation could see the Bank’s policymakers opt for a smaller increase of 0.25 percentage points rather than another 0.5% rise.

But CPI is still a long way from Prime Minister Rishi Sunak’s target to halve inflation to 5.3% by the year end, with inflation having proved more stubborn than expected in recent months.

Chancellor Jeremy Hunt said: “We aren’t complacent and know that high prices are still a huge worry for families and businesses.”

He stressed the need to “stick to the plan” to bring inflation under control.

Asked if the decline in inflation means the Bank should ease up on interest rate hikes, Mr Hunt said: “What we have seen is the Bank has taken very difficult decisions and the Government has taken very difficult decisions in the autumn statement to make sure that we really do start to bring down inflation.

“We are seeing the first fruits of that but there’s a long way to go and we need to remember that families are still feeling a lot of pressure.”

The ONS said falling fuel prices was the biggest driver behind the drop, down by a record 22.7% in June, while food price inflation pared back to 17.3% from 18.7% in May, though it is still painfully high.

Average petrol and diesel prices were 143p and 145.7p a litre respectively last month, compared with 184p and 192.4p a year earlier, according to the ONS.

In another encouraging sign, so-called core inflation data was also better than feared, falling back to 6.9% from a 30-year high of 7.1% in May.

Core CPI – which excludes the price of energy, food, alcohol and tobacco – is often more in focus for the Bank’s Monetary Policy Committee (MPC) members when they set interest rates.

Economist James Smith at ING said it will be a “close call” whether the Bank votes for a quarter or half percentage point rise in August, with record wage growth being watched intently.

He said: “Is this enough to convince the Bank of England to opt for a 25 basis point rate hike in August?

“We think it probably will – but it’s going to be a close call.

“The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply.”

The latest figures also showed that the CPI measure of inflation including housing costs (CPIH) fell to 7.3% from 7.9% in May, while the Retail Prices Index slowed to 10.7% from 11.3%.