Bank of England presses pause on interest rates again
- The Bank of England held rates at 5.25% – this is likely to be the peak.
- Inflation is expected to start dropping again when the October figures are published.
- Rate cuts are unlikely until at least the middle of next year, and even then are expected to be very gradual.
- UK economy expected to flatline until early 2025
- What this means for mortgages.
- What it means for savings.
- What it means for annuities.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“The Bank of England is singing the same tune as the Federal Reserve and has stayed firmly in the ‘wait and see’ chorus, cautious that the full impact of interest rates hikes has yet to be felt. The decision to press pause, and hold rates at 5.25%, was widely expected, so caused no major market movements initially. The FTSE 100 has remained deep in positive territory, while the pound shifted slightly higher against the dollar, building on gains made since yesterday, though sterling is still largely hovering around lows not seen since March.
Although this wasn’t a unanimous vote, there is a growing strength of feeling that previous rate hikes need more time to feed through. There are deepening concerns about the faltering economy as the high borrowing costs batter financial resilience and policymakers paint a stark picture of a stagnation scenario lasting until 2025. The minutes highlight that UK GDP is expected to have been flat in the third quarter, weaker than initial estimates. The economy only just eked out growth in August and there has been a surge in company insolvencies.
Although inflation was still more than three times the bank’s target, it’s expected to have taken another big step down in October, and private sector wage growth is also showing signs of easing. It’s far from surprising that the majority of policymakers want the economy to take a breather from this painful cycle of rate hikes. The potential for oil prices to shoot higher remains a worry, but not a major concern right now. So, barring further shocks, it looks highly likely we have hit the peak in the cycle, but cuts are still not expected until the second half of next year.”
What it means for mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“After wrestling with runaway rate rises for almost two years, this is a welcome pause for breath, at what is now expected to be the peak for rates. The pause was widely predicted and has been priced in, so we’re not expecting any big rate movements for either savings or debts.
Tracker mortgages will naturally hold steady because they move with the base rate. Fixed rate mortgages, meanwhile, could drop very slightly. They have already fallen from a recent peak in August, because fixed rates are mainly driven by expectations, and over the past few months, more market players became convinced this was the peak for rates. If this pause persuades more of them there are no more rises on the cards, fixed rates could fall a little further. However, we’re not expecting any big moves from here until the market starts to expect a forthcoming rate cut – which will be months down the track.
If your fixed rate deal is coming to an end, you might opt for a variable rate deal, in the expectation monthly payments will hold steady for a significant period and then drop. However, there are no guarantees, and stubborn wage rises or inflation could prompt a rate rise that pushes your costs up. If you’re worried about uncertainty, you might opt for a fixed rate deal now – up to six months before the remortgage is due. If rates fall from here, you can ditch the deal and shop around. However, if rates go up from here, you’re protected.
What it means for savings
We may well have passed the peak for savings, with some of the best fixed rates gradually disappearing. The good news is that the market hasn’t moved particularly swiftly to reduce savings rates. The Bank of England has indicated it’s prepared to leave rates higher for longer to keep inflation under control, so cuts are unlikely until at least the middle of next year, and even then, are likely to be very slow and gradual. It means there are still decent rates around, so if you have savings you won’t need for the next year or so, it’s still worth taking advantage while you can.
We can’t be sure rates won’t go any higher. If inflation surprises on the upside, there’s still the chance the Bank of England will raise rates. If it does this, or even if the market thinks it will, then savings rates may move northwards again. However, this remains a possibility rather than a probability, so isn’t worth holding on for.”
What it means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown
“We may not have experienced the crazy increases in annuity rates that we saw back in 2022 but they have been creeping up during 2023 and sit close to the levels seen in the aftermath of the mini-Budget. After years in the doldrums annuities are well and truly back in the spotlight and offering the best value in years which is great news for anyone in need of an element of guaranteed income in retirement. Today’s pause in interest rates as well as the elevated bond yields that we’ve seen should further support these higher rates.”
