Bank of England sits on its hands, but you need to get your finger out
- The Bank of England has held interest rates at 5% for a second month, as expected.
- The committee voted 8:1 to keep rates on hold, with one vote for a cut.
- What this means for investors
- What this means for savings
- What this means for annuities
- What this means for the property market
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
What this means for investors
“There’s been no big September surprise from the Bank of England, given the decision to keep rates on hold, but the note of caution from policymakers has caused concern to creep in about the pace of rate cuts ahead. The FTSE 100 gave up ground as Governor Andrew Bailey underlined there was wariness around the table about cutting too fast or by too much. The recent rise in services inflation will have been a concern, with worries it could be passed on in the form of higher prices to consumers. Nevertheless, there is still optimism that although the path may be a bit slower, the recent painful era of high interest rates is still coming to an end. That would offer more relief for companies and consumers who have been struggling with high borrowing costs.
There is still an underlying pulse of positivity lifting London-listed stocks, as they have also been buoyed by the decision by the US Federal Reserve to cut rates for the first time in more than four years, a larger than usual 50bps downwards step. The Fed’s priority for now is protecting the health of the US economy, rather than beating inflation right down to target. That’s reassuring for investors in multinational companies listed on the FTSE 100, reliant on a more buoyant outlook for the world’s largest economy. The pound has made further gains, reaching a two-year high against the dollar. But it’s not exerting huge downwards pressure on share prices. Hopes that the US will avoid a downturn appear to be outweighing the pressure on dollar-denominated revenues due to the currency movements. The more domestically focused FTSE 250 has also held onto gains, amid hopes that with interest rates still forecast to fall again by the end of the year, there may be more relief in store, particularly for consumer-focused stocks.’’
What this means for savings
Mark Hicks, Head of Active Savings, Hargreaves Lansdown:
“The decision to hold interest rates steady at 5% is good news for savers. Banks and building societies had started to price in the possibility of a cut over the past few days, and if this had materialised, we would have seen others swiftly follow suit.
However, this good news is unlikely to last. Further cuts later this year are likely to hit the easy access market the most, because those rates remain the most sensitive to the base rate. Fixed rates are still the best option for anyone who doesn’t need the money close at hand. They offer similar rates to the easy access market, and mean savers can lock in these rates for the entire fixed period. As the downward trend in global interest rates is well under way, it will now become a question of how far rates will fall – and at the moment, the end isn’t in sight anytime soon.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“The Bank of England keeping interest rates on hold will contribute to the steady state of the annuity market. The latest data from the HL annuity comparison tool shows a 65-year-old with a £100,000 pension can get up to £7,102 from a single life level annuity – not as high as you could get in the aftermath of the mini-Budget, but good value nonetheless.
However, we are expecting further interest rate cuts to come in the coming months and when they do, we could see annuity rates start to fall. It’s unlikely to be a steep or sharp fall as we won’t see interest rates cut anywhere near as quickly as they were hiked. We also aren’t expecting a return to the ultra-low interest rates of the past. However, the prospect of falling incomes will be enough to persuade those who had hesitated to take the plunge, to go ahead and buy an annuity, contributing to what will surely be a bumper year for the market.
Anyone looking to secure a guaranteed income should make sure they use an annuity comparison tool to make sure they get the latest rates from across the market. Rates can vary between providers and once bought an annuity cannot be unwound, so it pays to see what the whole market can offer you before taking the plunge.”
What this means for the property market
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“The Bank of England is following a well-trodden path – pausing rates while it waits for more clear-cut signs that inflation is under control. The mortgage market has the same map, so was expecting it to take this particular direction. It means we’re unlikely to see any major repricing from the banks.
Those on tracker rates and standard variable rates will be disappointed. When they opted for these deals, they’ll have hoped rate cuts would come thick and fast, but cuts have been decidedly skinny and sluggish. Fortunately, there’s some hope ahead, with the market expecting more cuts this side of Christmas, and the prospect of their finances finally easing a little.
The vast majority of the mortgage market is still fixed, and there’s better news for those looking for a new deal or facing a remortgage, because the market has already priced in the cuts it’s expecting over the next couple of years. The average 2-year fixed rate mortgage is currently 5.37% – a far cry from just three months ago when it was knocking on the door of 6% (5.97%). Competition is hotting up, and we’ve seen rates launched at less than 4%, which bodes well for buyers.
This is particularly good news for higher earners, who are carrying bigger mortgage, for whom the prospect of remortgaging onto a higher rate was particularly alarming. Figures from the HL Savings & Resilience Barometer show that the average middle earner has a monthly mortgage payment of £567 – around half that of those on the fifth highest incomes, who pay £1,053. It’s also good news for younger buyers, who face the double whammy of having less equity and being on a lower income. Millennial and Gen Z owners pay an average of £742 a month, so will have been particularly worried that a remortgage could make an even bigger dent in their monthly budget.
The hold on rates isn’t the most significant thing driving sentiment right now, so is unlikely to move the market. Buyers are benefiting from wages outstripping inflation – making them feel wealthier. Meanwhile, mortgage rates have been falling, making properties feel more affordable. The longer this continues, the more positive sentiment is likely to be, and the better the chances of a lively property market as we go through the rest of the year.”
