2 years on from the first rate rise – the economy, annuities, savings and mortgages
- Interest rates started rising from their rock bottom level of 0.01% on 16 December 2023.
- They hit 5.25% in August this year, and have remained there since.
- We reveal how this has affected the economy, annuities, savings and mortgages.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“The era of cheap money hurtled to an end two years ago, as the first in a painful series of interest rate hikes was inflicted on the economy, in an effort to drive down demand, and prices. Inflation has been a hard nut to crack, fuelled by the pent-up frenzy for goods and services following the pandemic, squeezed supply chains and then the shock of the Ukraine war.
The economy
The tools the Bank of England can employ to cut rampant inflation are blunt, so the financial pain has been felt unevenly. Mortgage holders having to renew deals have curtailed spending. Landlords have felt the pressure, passing on costs to tenants, many of whom have struggled with the rising costs of essentials. Businesses, which became used to low-cost loans, have struggled, especially given the surge in energy bills and wages, with insolvencies rising sharply. There were 2,315 official insolvencies in October, according to the latest data from the ONS, up around 54% compared to two years ago.
But some people have been less affected – including higher earners still sitting on lockdown savings, and the third of households who own their property without a mortgage. They’ve continued to spend, helping the economy escape a predicted recession.
Even so, the volume of retail sales has fallen back. It has been bumping along in stagnation mode, and is set for meagre growth. The government feels its hands are tied in terms of taking on extra lending from investors to jump start the economy, because long-term borrowing costs have shot up so dramatically over the past two years. 30-year gilt yields rose to their highest levels in a quarter of a century in October, staging a dramatic increase from 0.92% in December 2021 to 5.13%. Although they’ve dipped a little, they are still hovering around levels not seen since the financial crisis in 2008.
The UK is still in a tight spot, and without bolder action to super-charge investment and the supply of goods and services, growth prospects look dim. Although the FTSE 100 has risen since the first interest rate hike in the cycle was imposed, appetite for UK stocks has remained subdued, partly due to the economic outlook. The index is up 3.5% since December 2021, but it lost ground gained earlier this year when it breached the 8,000 mark in February.
It has been another rollercoaster ride for the pound, which took a big turn for the worst after the Trussenomics mini-Budget in September 2022, when it fell to $1.07. Although it has recovered as those plans for unfunded tax cuts were dropped, sterling is still down by around 4.5% against the dollar, compared to two years ago. The fall has prompted a flurry of private equity takeovers, indicating there is significant value to be found on the London Stock Exchange.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown
Annuities
“The past two years has seen a major revival in the fortunes of the annuity market. After being relegated to the sidelines by Freedom and Choice reforms, annuities have stepped back into the spotlight, as rising interest rates helped incomes to soar.
A 65-year-old with a £100,000 pension can now get up to £7,149 per year from an annuity – a massive 44% increase on the £4,953 they could have got two years ago. Rates rocketed skywards during 2022, hitting a high in the aftermath of the mini-Budget. They have since fallen back a bit and settled down, but they continue to offer the best value they have for years, and this is prompting more people to take a closer look at how they can include them in their retirement planning.”
Sarah Coles, head of personal finance, Hargreaves Lansdown:
Savings
“The past two years has lifted savings rates out of the doldrums, to hit higher levels than we’ve seen for decades. In December 2021, according to figures from the Bank of England, the average fixed rate offered 1.58%, and the average easy access account just 0.09% – the lowest ever recorded in this series. By October this year, the average fixed rate had soared to 5.27% and the average easy access account to 1.99%.
The impact hasn’t been felt across the board, because the high street banks have been horribly slow to pass on rate rises. It took an average of 11 weeks for them to budge after the first six rate rises. The smaller and newer banks, and cash savings platforms, worked harder for savers’ money, but were hampered to some extent by the might of the giants.
In recent months, the FCA has leaned harder on the high street banks, so they’re moving a bit further and faster. The average easy access rate was 1.66% in July, which rose to 1.99% in October – despite the fact that the base rate was only up 0.25 percentage points in that time. This is undoubtedly better, but it’s hardly a rate to write home about. On 4 December, there were 311 easy access accounts paying over 3%, 173 over 4% and 37 over 5%. It means the best rates are still reserved for those who are prepared to shop around.
The rise hasn’t been in a straight line either. Rate rises were very gradual in the early months, as savings accounts inched ahead of one another – trying not to get too far ahead of the pack and soak up too much cash at too high a price. The mini-Budget in September last year accelerated the rise. It wasn’t as dramatic as the overnight hikes in the mortgage market, but the Bank of England figures show the average fixed rate rose from 1.94% in August 2022 to 3.62% in October 2022. They then fell back a bit, rose again, and stalled. They didn’t go above 3.62% again until we had early signs that inflation was stickier than expected in April 2023. Rates rose from there to the latest Bank of England figure in October (5.27%). However, we know this was around the peak, and they’re likely to have fallen back a little since.
Mortgages
We’ve seen nosebleed-inducing ups and downs in the mortgage market over the past two years. They started at incredible lows, with most people on fixed rate mortgages having fixed below 2%.
Unsurprisingly, mortgage rates responded more quickly to rate rises than savings, but they were still relatively sluggish in the early days.
However, the impact of the mini-Budget was devastating for the mortgage market, with vast swathes of the fixed rate market withdrawn entirely while chaos reigned in the swaps market. When they returned, they were at a much higher level, with the average two-year rate hitting a peak of 6.65% on 20 October, according to Moneyfacts. They then fell back until the spring, as the market realised it may have over egged its rate expectations, and started to factor fewer in.
It was all change again at that point, when inflation was proving surprisingly sticky, so lenders started to price in more rises again. Moneyfacts data shows that the average 2-year fixed rate mortgage rose from 5.35% at the beginning of April to a recent peak of 6.85% at the start of August. As a result, Bank of England figures show a big drop in mortgage approvals. As buyers hurried out of the market, prices fell.
Mortgage rates have dropped gradually since, with the average five-year rate falling below 6%, and the average two-year rate threatening to do so. However, we’re still worlds away from where rates were before all this kicked off, and there’s no expectation for us to get back there again in a hurry.”
