The Bank of England has finally put the brakes on the relentless rate hiking cycle. A rise had been heavily pencilled in, but was wiped off the board by the surprise fall in inflation.
Even before the announcement, the markets reacted, with implications for savers, mortgage borrowers and anyone considering an annuity.
As the market digested the news that inflation had come down, it decided a rate rise wasn’t so likely after all.
As a result, bonds started to look comparatively attractive, so money flowed into them, bond prices rose, and yields fell.
Yields are important here, because fixed rates tend to rise and fall with them. So this could be good news for borrowers, but less positive for savers.
However, this isn’t the full story, because the Bank of England made it clear that it’s still locked in a fight against inflation.
Rates could go up again in future, and at the very least are expected to hold at this level for a significant period until inflation is under control.
It means we’re not expecting seismic shifts, so there are opportunities for those who act fast, and some comfort for those who can’t.
The pause in rate hikes is immediately better news for anyone with a variable rate mortgage, who can finally see their monthly mortgage payment hold steady for a month. Of course, there are no guarantees that this is the end of it, but they can at least take a breath.
There are also positive signs for fixed rate mortgages.
If lenders are going to the market for new fixed rates right now, the fact that the market’s rate expectations have fallen could mean lower mortgage rates.
It means that anyone expecting to remortgage in the coming months may want to check the market, to see what’s available.
If they can lock in a lower rate now, they will have secured a better deal if mortgage rates rise in future.
If, however, mortgage rates continue to fall, they can shop around when it’s time to remortgage and find a cheaper deal.
This is likely to be the top of the savings market, at least for now. Now that rate rises have paused, banks won’t be pricing in higher rates during the fixed period, so rates will settle, and are likely to fall.
If you’ve been waiting to fix near the top, it’s worth getting your skates on.
The very best deals may not be around for much longer. If you haven’t switched your easy access rate for some time, it’s also worth making a move while there are some really attractive rates on the market.
However, this isn’t time to panic.
If your current fixed rate deal doesn’t come to an end for a while, don’t lose faith.
The Bank of England’s insistence that the fight against inflation is ongoing means we could see more rises further down the line, and at the very least is likely to mean it keeps interest rates higher for a considerable period.
It means that while we may see some of the most competitive rates retreat, we’re not expecting dramatic drops in the immediate future.
What next for annuity rates?
Annuities have enjoyed renewed fortunes over the past two years as gilt yields soared. Back in September 2021 a 65-year-old with a £100,000 pension could expect to get an income of up to £4,940 a year from their annuity, said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. Morrissey continued, this then soared to more than £7,500 a year in the aftermath of the mini-Budget, after which incomes settled down with the same person now able to get up to £7,317.
Compared to the picture just two years ago this is a huge increase that can make a material difference to someone’s retirement planning.
Today’s interest rate pause could cause long-term gilt yields to fall back and if this is the case, we may see providers opt to cut their annuity rates in the coming weeks.
Despite this, annuity incomes remain substantially higher than they have for several years and should always be a factor for anyone looking for an element of guaranteed income in retirement, Morrissey concluded.
This is good news for investors – coupled with the news yesterday about inflation coming down, pausing rates indicates greater conviction in the economy, and the end – or near end – of this rate hiking cycle, said Emma Wall, head of investment analysis and research.
Wall continued, inflation is bad news for nearly all asset classes, it both erodes returns and makes it harder for investors to find cash to invest in the first place.
Yes, higher rates have been good for both cash and gilts, but they’ve also been a sign of economic malaise, so investors should welcome this move from the Bank.
UK equity income funds offer an interesting opportunity- an undervalued market with good dividend cover will help combat inflation while it (hopefully) dwindles, concluded Wall.
Hina Bhudia, Partner, Knight Frank Finance, comments:
“Yesterday’s positive inflation figures and the Bank of England’s decision to hold the base rate at 5.25% will both pave the way for lenders to make more cuts to mortgage rates in the weeks ahead.
The pace at which borrowers are opting for tracker mortgages over fixed rate products will now pick up. Both trackers and two year mortgages are priced in similar ranges.
If the base rate has now peaked and rate cuts begin around the middle of next year as analysts expect, then borrowers stand to save money by opting for a tracker mortgage.
Mortgage rate cuts have improved sentiment significantly, but they will eventually reach a natural plateau, with the best fixed rate deals starting with a four.”
Jeremy Leaf, north London estate agent and a former RICS residential chairman, comments:
“The unexpected fall in inflation made this interest rate decision harder than it might have been.
Last week it was an odds-on certainty that rates would rise by at least a quarter point but the climate has since changed.
What it does show is that it is dangerous to make a snap decision based on one month’s figures and then regret it later.
Stability is so important to the property market and brings confidence to buyers and sellers sitting on the fence finding it difficult to budget before deciding to make their moves.
This hold, after many months of rises, will bring some welcome reassurance.”
Anna Clare Harper, CEO of sustainable investment adviser GreenResi, comments:
“It will be a relief to the two million households with mortgages on variable rates, or with their fixed rates coming to an end by the end of this year that base rates have been held this month.
However, we are not yet ‘out of the woods’. Inflation remains high, meaning that base rates are likely to rise again.
Despite this month’s ‘pause’, we can expect to see many more property owners with higher monthly interest payments selling this year and next.
Investors we work with are currently buying properties at up to 30 per cent below peak 2022 house prices, though it is worth noting that peak values reflected a mini-bubble from reduced stamp duty combined with very low interest rates through Covid.
Housing affordability is more significantly affected by base rate rises than by house price trends, so all eyes will be on the next rise which has a strong impact on affordability for homeowners and renters alike.”
Paresh Raja, CEO of Market Financial Solutions, comments:
“It was a close call, and a welcome surprise for most. By and large, lenders had expected – and priced in – another 0.25% hike today, so this decision will inject a little more spark into the market.
Indeed, even with the expected hike, rates had stabilised in recent weeks, with the lending industry increasingly confident that we’ve reached the top of the interest rate hill that has been climbed since December 2021.
Still, there will be a natural period of adjustment in the months ahead.
Looking at the bigger picture, a base rate of 5.25% is not abnormal, but borrowers had grown accustomed to a period of record-low rates.
As we are now less likely to see any notable swings in the base rate, house prices will likely settle as buyers can establish what their real spending power is.
Lenders and brokers must be proactive in helping in that regard – providing clarity and assurance to borrowers wherever possible, allowing them to enter the property market with confidence.”
Commenting on the pausing of an interest rate hike providing some reassurances for businesses and consumers alike, Douglas Grant, Group CEO of Manx Financial Group PLC, said:
“After the unexpected and encouraging decrease in CPI inflation witnessed yesterday, an interest rate hike has also been paused providing some reassurances for businesses and consumers alike.
With Small and Medium Enterprises (SMEs) representing approximately half of all private sector turnover in the UK, it is imperative that we devise innovative measures to safeguard their viability.
SMEs should continually look to assess their existing lending structures and proactively prepare for the challenges ahead.
Recent research conducted by Manx reveals a significant shift in the financial landscape for SMEs.
Compared to last year when only a quarter encountered obstacles, two in five SMEs have now either halted or slowed down some aspect of their operations due to a lack of external financing.
Furthermore, the survey uncovered that 15% of SMEs in need of external finance and/or capital were unable to access the required funds.
This scarcity of financial resources poses a substantial impediment to SME growth, necessitating immediate action to bridge the funding gap.
In light of implementations such as the short-term loan schemes introduced in recent years, we firmly advocate for the continuation and expansion of government-led initiatives aimed at bolstering SME resilience and reigniting growth.
Our proposition revolves around the establishment of a permanent government-backed loan scheme, tailor-made for various sectors, and involving both traditional and non-traditional lenders.
As apprehensions mount regarding the future state of the economy, the implementation of such a permanent scheme takes on paramount importance; it has the potential to serve as a pivotal factor in sustaining economic recovery and ultimately influencing the survival prospects of numerous companies.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, comments:
“Following better-than-expected inflation figures, the Bank of England has made the wise move to halt the consecutive rate hikes and give them time to do their job.
Consecutive rate rises have been painful; it’s time to leave alone for now, rather than causing continued anxiety and distress for borrowers.
Many lenders have substantially reduced their fixed rates in the past few days and weeks on the back of calmer Swaps, which underpin the pricing of fixed-rate mortgages.
While the days of rock-bottom mortgage rates are long gone, we expect pricing to improve further over coming weeks and numerous sub-5 per cent five-year fixes to come to the market.
Supply is outstripping demand, which will drive down rates and Swaps, while still a little volatile, are trending downwards.
While we know this can all change again on the back of negative data, for now the outlook is much more promising than it was three months ago.
Borrowers due to come off cheap fixes still face a payment shock, so it is important to plan ahead as much as possible and act now.
Rates can be booked up to six months before you need them so speak to a whole-of-market broker as to what’s available.
If when you come to remortgage rates are cheaper, borrowers can choose another deal.
Many borrowers are opting for shorter-term fixes or base-rate trackers with no penalties in the hope that they can fix for longer once rates become more palatable.”
Gareth Lewis, managing director of property lender MT Finance, comments:
“Some good news at last for the market, the beginning of the consistency and stability it needs.
Too much uncertainty is not good for confidence but with inflation coming down further and the Bank of England choosing to keep rates where they are, in theory this should be the peak.
The knock-on impact is that borrowers have a better idea as to where they stand and where mortgage pricing is going to be.
Don’t get me wrong – plenty still needs to be figured out as affordability is still an issue, thanks to the many rate rises we have already seen.
But this is something lenders can strategise around in terms of products and people will be more willing to take out a mortgage as they will have a better idea of where rates will be in six months’ time.
This is a great opportunity for the back end of the year.”
CEO of Octane Capital, Jonathan Samuels, comments:
“The latest figures released this week suggest that inflation is now starting to ease.
This is why the base rate has been left unchanged and will no doubt be heralded as proof of success by the Bank of England with respect to their approach to managing the economy.
However, it’s fair to say that had they acted with greater speed and intent, the rate of inflation wouldn’t have maintained such a stubborn trajectory in the first place.
Previous incremental increases to the base rate simply haven’t been effective enough and, as a result, the financial hardship felt by many households has been unnecessarily prolonged.”
Jason Ferrando, CEO of easyMoney comments:
“Yet another base rate increase may have been viewed as overkill due to the fact that inflation has started to ease in recent months, but it’s fair to say that the job is far from done and so many will argue that a freeze perhaps wasn’t the right path to take today.
We’re yet to see prices actually fall and it’s simply the speed of increase that has reduced.
So it would be a shame for the Bank of England to fall asleep at the wheel now, just as they were starting to make some progress.”
Director of Benham and Reeves, Marc von Grundherr, comments:
“Today’s freeze will be a small victory for the nation’s homebuyers who have seen the financial goal posts move constantly in recent months.
But despite rates remaining unchanged there will still be a real worry for those coming to the end of a fixed rate term, having previously locked in at a relatively affordable rate when they first purchased.
When their mortgage term does expire, they are likely to find that the cost of their monthly repayments has risen considerably and this is really the last thing anyone wants to contend with, not only with the current cost of living, but with Christmas just around the corner.”
Managing Director of Barrows and Forrester, James Forrester, comments:
“Good news for borrowers and today’s decision will bring about a notable boost to an otherwise uncertain housing market.
We’ve already seen signs that mortgage rates are falling this week, driven by a reduction in swap rates and this could well be the peak, with rates set to reduce from here on out.”
Managing Director of House Buyer Bureau, Chris Hodgkinson, comments:
“Despite today’s freeze many of those considering a property purchase are likely to remain sat on the fence while the cost of borrowing remains considerably higher than it has in recent times.
For sellers, this means less interest from buyers, a prolonged transaction timeline and a greater chance that their sale could fall through due to heightened market uncertainty.
The one positive to take is that house prices are yet to show any significant signs of instability and so those who can secure a buyer should still be able to sell for a good price, albeit it may take some time longer to do so in current market conditions.”