- Interest rates are likely to be held at 5%.
- Over the past quarter, unemployment and inactivity have fallen, while employment has risen – signs of economic strength that made a cut less likely.
- Wage growth slowed, but remained ahead of inflation – so it remains a potential inflationary risk, making a cut less likely.
- Inflation rose less than expected in July, from 2% to 2.2% – making a cut less likely.
- Rate expectations
- What this means for savings and mortgages
- What this means for annuities
Rate expectations
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“With the economy flatlining again in July, this picture of summer stagnation is another piece in the jigsaw for Bank of England policymakers to consider when they meet next week. Even though economic growth is clearly flagging, partly as high interest rates take their toll, policymakers still look set to be wary, and keep rates on hold.
Although the once red-hot labour market is well on the way to cooling down, with regular pay growth (excluding bonuses) falling to 5.1%, it still might be weeks rather than days before borrowing costs come down. The rate of wage increases is still running at more than twice the rate of consumer price growth and there are still niggles of worry that those high wage bills might be passed on as higher prices for goods and services.
Financial markets are pricing in the likelihood that the Bank will keep rates on hold this month at around 75%. Although two interest rate cuts are priced in before the end of the year, it’s looking more likely that they will land in November and December. A lot is likely to be riding on August’s CPI number, due out just a day before the big interest rate decision.’’
What this means for savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown:
“The decision to keep rates on hold this month is already largely baked into the deals on offer, as are the two rate cuts forecast for later in 2024. Fixed rates on average across Active Savings have fallen by more than the 25bp cut in the base rate in August, implying banks and building societies are expecting further cuts to come through.
The expectation of lower rates in the coming months has been behind the slow slide of rates throughout this year, and it’s why only a handful of accounts are still clinging on above 5%. Savings rates aren’t moving at a tremendous pace, but over time, it’s starting to make a serious difference. Moneyfacts figures show the average 1-year fixed rate has dropped from 5.39% to 4.39% in a year. Meanwhile, easy access rates depend far more on the immediate future, so average rates have declined far more slowly – from 3.2% in October last year to 3.08% today.
Rates aren’t falling fast, but they are falling. If savers can afford to lock money away in fixed rate terms, it has certainly been the right strategy over the past three months and it will continue to remain the best strategy as the end of 2024 approaches.
Some of the best rates on the Active Savings platform are for accounts that are fixed for less than a year, so even if you need the cash in the next few months, you can still use a fixed rate account to make the most of your money.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“With no movement expected for interest rates next week, we can expect annuity rates to remain settled for the time being. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,102 per year from a single life level annuity. However, the prospect of cuts looming on the horizon in the coming months does mean we can expect to see incomes shift downwards, though it’s fair to say they will not fall anywhere near as far or as fast as they were hiked.
This means we should continue to see strong interest in people looking to secure a guaranteed income from the annuity market, though it is vital to make sure that you check quotes across the market before making a final decision. Simply opting for the first quote could see you thousands of pounds worse off over the course of your retirement, so it really pays to get a range of quotes from an annuity search engine before making your choice.”
What this means for mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“There’s good news and bad news on mortgages. The good news is that fixed rate deals are on their way down, because the cuts expected later this year are already priced into these products. This time last year the average 2-year fix was 6.66%, whereas now Moneyfacts figures show it’s 5.52%. The average five-year fix has also dropped – from 6.15% to 5.18%.
It’s one reason why mortgage approvals have risen, and buyers are returning to the market – because the feel-good factor injected into property by the first Bank of England rate cut is backed by slightly more affordable mortgages. The prospect of a remortgage isn’t looking quite so hideous either now. The HL Savings & Resilience Barometer shows that remortgagers are likely to be moving from a rate of 2%-2.5% to one between 5% and 5.5%. It a less painful jump than for all those who faced a rise from less than 2% to more than 6%.
Meanwhile, there’s bad news for those on variable rate mortgages, who could easily have waited for over a year for a cut they had expected to be imminent. They now have to wait another month or two to make another inroad into their monthly payment. Their mortgage rate is likely to ease a little by the end of the year, but it’s nothing like the scale of cuts they might have expected when they remortgaged onto a variable deal.”
