Bank of England’s third rate pause – two years on from the first rate rise
- The Bank of England held rates at 5.25%.
- Rates started rising on 16 December 2021.
- Inflation is expected to be lower in November figures out next week – albeit a smaller drop than in October
- The conversation has turned to when rates could be cut.
- 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 isn’t budging from the summit, and as expected, policymakers are keeping rates on hold. Stubborn inflation is still a worry and it looks like we are set to be stuck on this cold high plateau for some time. The descent, when it comes, is likely to be gradual rather than a vertiginous drop.
The timing of any cut will depend on treading the delicate balance between cooling inflation and supporting the economy, given that stagnation conditions have bedded in. Inflation is set to fall in next week’s figures – although not as dramatically as a month earlier. In fact, over the course of 2024, inflation may not fall as far, or as fast, as you may suspect – because the Bank of England will need to contend with domestically-fuelled inflation, which is a tough nut to crack. As a result, the Office for Budget Responsibility thinks inflation will average 3.6% in 2024. To keep this under control, the Bank of England is going to need to keep an iron grip on interest rates.
On the other side of the coin is the state of the economy, which has just delivered particularly uninspiring GDP figures. All eyes will be trained on jobs and wage growth, and weakness in either could be the canary in the coalmine for the economy, which has been sustained by robust spending. If we get more weakness than is currently expected, that might encourage the Bank of England to cut rates sooner.
Right now, forecasts for the first rate cut are spread between the spring and winter next year. On balance, cuts are unlikely until the second half of next year and even then, we’re expecting them to be fairly sedate. The mortgage and savings markets, however, won’t stand still waiting for something to happen.
What it means for mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“This interest rate pause was signposted more impressively than the entrance to a signpost symposium. Unless something wildly unexpected happens, we’ve hit the top of the rate rise cycle, and the question is no longer what will happen next to rates, it’s how long we’re going to wait until we see cuts, and what this means for mortgages.
Tracker mortgages will hold steady when rates are on hold, because they move with the base rate. Fixed rate mortgages, meanwhile, are on their way down – and the average two-year rate has dropped below 6%. Fixed rates are mainly driven by expectations, and right now the market is expecting Bank of England rate cuts sooner rather than later, which is feeding into cheaper deals. We can expect more of the same in the coming months.
If your fixed rate deal is coming to an end, you might opt for a variable rate deal, in the expectation that monthly payments will hold steady for a significant period and then drop. However, there are no guarantees. If you’re worried about uncertainty, you might opt for a fixed rate deal.
Of course, for anyone who fixed two years ago or more, even after the falls of recent weeks, a remortgage is going to be incredibly painful, because they’re likely to have fixed for less than 2%. We’ve seen nosebleed-inducing ups and downs in the mortgage market over the past two years – with two-year fixed rate deals hitting a recent peak of 6.85% at the start of August, before dropping back below 6%. However, this is a completely different mortgage landscape to two years ago, and there’s no expectation that we’ll return to the good old days in a particular hurry.”
What it means for savings
Mark Hicks, head of active savings, Hargreaves Lansdown:
“The pause is likely to cement expectations that we’re at the peak right now, and the next move will be downwards. This is already being priced into the market, and we’ve seen rates come down. The market isn’t expecting imminent and rapid falls in the Bank of England rate, so we’re not seeing massive drops in savings rate. This is more a case of a solid downward trend we expect to endure in the coming months.
We’re also seeing a flattening of the yield curve, which means you’re getting very similar rates on easy access and fixed rate savings. You will need some of your cash in an easy access account for emergencies, but if you’re holding some for at least a year, it still pays to consider a fixed rate savings account, because that rate is guaranteed whatever happens to rates in the interim.
Despite the fact we’re seeing rates come down, they’re still at the kinds of levels we could only have dreamt of when rates started rising two years ago. Back in December 2021, Bank of England figures showed the average easy access account paid 0.09%, whereas the best on the market are offering over 5%. It means that although rates are on their way down, there are still some great rates around if you look beyond the high street giants to smaller and newer banks and cash savings platforms.”
What it means for annuities
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:
“The annuity market has been a huge beneficiary of rising interest rates, soaring by more than 40% over the past two years. We’ve seen the market settle in recent months, but the fact remains that annuities are delivering the best value they have in years.
According to HL’s annuity data a 65-year-old with a £100,000 pension can get up to £7,147 per year from an annuity, whereas back in December 2021 it was less than £5,000. We’re unlikely to see much movement in the market as a result of today’s pause, but this could encourage those who have been in the market for an annuity but hesitating for fear of missing out on a better rate.”
