- The Bank of England is expected to raise rates next week, which could bring us to the end of the rate rise cycle.
- What this means for savings.
- What it means for mortgages.
- The implications for annuities.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The cost-of-living crisis, high borrowing costs, bad weather and strikes have all conspired to cause the economy to contract. As the resilience of consumers and companies is chipped away, more demand is set to be squeezed out of the economy, which should help limit price rises going forward.
Nevertheless, with wage growth still hot and fuel prices higher, it still looks likely that the Bank of England will raise interest rates again next week from 5.25% to 5.5%. The upcoming inflation snapshot will be closely watched for signs that core inflation, which strips out the volatile food and energy prices, is still proving sticky.
The September rate decision may well mark the end of the hiking cycle, given that unemployment has also ticked up, companies are showing more reluctance to hire staff and we have still yet to feel the full effect of previous rate increases. But higher rates are set to linger given that the 2% inflation target still seems so far away, so right now a cut isn’t expected until at least the second half of next year.’’
What it means for savings
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Assuming we’re coming to the end of the rate rise cycle, this could be as good as it gets for fixed rate savings. Anyone who has been waiting for rates to peak before fixing may not want to wait much longer.
The Banks don’t just focus on the immediate future when setting fixed savings rates, they look at what’s likely to happen to interest rates during the entire fixed period. The fact that this may be the last of the hikes means there’s little incentive for them to put rates up further.
In fact, the very best fixed rates over two and three years are down a little from their July levels – from 6.15% to 6.05% over two years and from 6.06% to 6% over three. This is because in the early summer, inflation came in higher than expected, so the banks thought rates would have to stay higher for longer. In the intervening months, inflation has fallen, so they’ve reined in their expectations and savings rates have eased off very slightly.
The one-year market differs slightly, because the launch of the NS&I bond paying 6.2%, which has encouraged more competition, and encouraged several players to push through the 6% barrier. It means the market may inch up from here, but we’re not expecting anything particularly striking.
Savers are already locking in better rates. The Bank of England figures show £10.1 billion went into fixed rate accounts in July – streets ahead of the monthly average of £5.9 billion over the previous six months.
The easy access market, meanwhile, is slightly more sensitive to rate rises. It has been inching up ever since the Bank of England started raising rates. The average is now over 3% and the very best at 5%. These may have slightly further to go. However, if you’re hanging around in an account paying next to nothing, it’s not worth waiting. It pays to switch to the best account today – you can always switch again later if rates rise much further from here.
There are no guarantees. There’s the chance that inflation is stickier than the market currently thinks, so rate expectations could rise – pushing up savings rates. Whatever you do with your savings, there’s always the chance of being unsettled by a market shock. However, if the worst that happens is you fix your savings for around 6%, then it’s hardly the end of the world.
What it means for mortgages
For anyone with a variable mortgage, this week’s rate rise is likely to make your monthly payments more expensive. Anyone who moved onto a variable deal when their fixed rate expired last autumn, in the hope that fixed rate deals would get cheaper, will have stomached a year of ever-increasing rates.
However, for those coming to the end of a fixed rate deal and looking to remortgage, the end of the rate rise cycle spells better news. The market has gradually accepted that we’re unlikely to get as many rate rises as it had feared, so rates have been gradually drifting south. Assuming no major shocks on the inflation front, this may well continue. It means yet again we could see the counter-intuitive mix of the Bank of England raising rates and the banks cutting theirs.
It’s going to take something more significant for a step change in rates, so we don’t expect huge movements in the immediate future. It means mortgages will still remain far higher than we have seen in recent years, and as people are forced to remortgage, it will take lumps out of their financial resilience. For that to change, we’d need to see market expectations of cuts, and for that we’re likely to have to wait much longer.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:
“Annuity rates have soared over the past two years reaching heights not seen since before the Global Financial Crisis. A 65 year old with a pension pot of £100,000 can currently get an income of up to £7,317 a year (single life, level, 5 year guarantee).This has been great news for retirees in need of a guaranteed income who had been disappointed by the poor rates on offer previously. In more recent months they have settled down and this may bring some relief to would-be annuitants who have been hesitant to take the plunge for fear of missing out on better rates further down the line. If interest rates rise as forecast, it’s unlikely we would see any huge spike, with rates remaining on an even keel.”