Rates held – but mood music is key not just drum beat of rate decision

• The Bank of England has voted to keep rates on hold at 5.25%.
• The committee voted 6:3 to hold rates – two voted to increase rates and one voted to cut.
• What next?
• What it means for savings.
• What it means for mortgages.
• What it means for annuities.

Details are available here: Bank rate maintained at 5.25% – February 2024 | Bank of England

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

”There were no bold moves in sight, just another hold from Bank of England policymakers. It’s hardly surprising that inaction is the order of the day, given that inflation ticked up in December. It hardly set the stage for an interest rate cut.

However, at the moment, all attention is on the mood music from the Bank of England rather than just the drum beat of the rate decision. There was a slight shift in sentiment around the table. Instead of three decision makers voting to increase rates yet again, two voted for a rate rise and one for a cut.

What next?

Interest rate cuts are still in the pipeline this year, but it’s clear they’ll take a bit more time to flush out. Inflation is expected to return to 2% in the middle of this year – but not for long. It’s expected to rise again in the second half of the year. The Bank of England didn’t waver from the line that monetary policy would have to ‘remain restrictive’ for ‘an extended period of time’ until inflation is ‘sustainably’ at 2%.

Much of the broader economic picture adds weight to the argument for cuts. Growth has been stagnant, and it’s likely the economy tipped into a very mild recession at the end of 2023, with companies and consumers showing a lot more caution in their spending patterns. Discounting in January helped push down shop price inflation to the lowest rate since May 2022.

Company insolvencies have shot up as the era of high interest rates has bedded in and amid worries about an uncertain economic outlook, underlying price pressures have shown signs of easing, with high wage growth dropping back a little. Inflation has also fallen faster than the Bank forecast back in November, despite the bump in December.

However, pay rises are still threatening to stay hotter than the Bank of England wants and even though energy bills are forecast to drop sharply in April, the creeping rise in crude prices, sparked by widening conflicts, is still a bubbling worry. The risk is that companies will pass on higher costs, with the British Retail Consortium warning this week that geopolitical tensions will also add to uncertainty and costs in supply chains. Business activity has found better form since the start of this year, with the PMI snapshot showing an expansion in January.

The Bank’s policymakers are highly unlikely to make a move before the March Budget, given that voter sweeteners like tax cuts and duty freezes could see demand in the economy tick up. The impact of delays to imported goods re-routed from the Red Sea is still uncertain, and could tip some prices upwards.”

What this means for savings

Mark Hicks, head of active savings, Hargreaves Lansdown:

“The surprise bump in inflation at the end of 2023 convinced the market that it was getting ahead of itself in forecasting the first cut in May and for rates to end the year at 4%. Now it’s expecting a cut in June, and for rates to fall to 4.5% by December. Today’s decision has done nothing to change that outlook.

For savers, it means we’re still seeing the best rates over 1 and 2 years at more than 5%, and those over 3-5 years are offering 4.5% or more. These sorts of rates were the stuff of dreams for more than a decade, so don’t let the talk of rate drops put you off switching or fixing, and taking advantage while you still can.

Predictions of interest rate cuts in the second half of the year mean that the best one-year fixed rate savings deal has now fallen below the best variable one, as banks price in the rate cuts they’re expecting. If you don’t need the cash for a year or more, you may be tempted to hold it in a variable rate account for a higher return in the short term. However, in the coming months, there’s a high chance that rates will fall, so if you don’t need the cash right now, fixing and guaranteeing the return for a year or more may well prove more rewarding.”

What this means for mortgages

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“We had seen rapid falls in mortgage rates from the peak in August. However, as a result of the rejig of expectations, those have slowed significantly, and have barely moved over the past week. The path is still downhill, and we expect cuts to keep coming, but lenders are pausing for breath. It means anyone holding out for significant falls before they buy may have a longer wait than they were expecting. For those with a looming remortgage, it means they may have a bigger mountain to climb in affording their new deal.

It makes shopping around even more vital, but if this isn’t enough to make a remortgage affordable, it’s worth talking to your lender, who may be able to offer an extension to the length of the loan, a temporary switch to interest-only or even taking a payment holiday. Some of these will have an impact on your credit record, but will do far less damage than missing payments.”

What this means for annuities

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:

“The interest rate hiking cycle saw annuity rates soar to heights not seen for years and sparked a revival in interest in a product that had fallen out of favour. We’ve since seen rates fall back from their post mini-Budget highs and recent months have seen them settle down – the decision to keep rates on pause today will add to this calmer atmosphere.

However, it’s fair to say annuities continue to offer good value with, a 65-year-old with £100,000 able to get up to £6,923 per year from an annuity according to data from HL’s annuity quote engine. This is a far cry from the £4,626 they would have got three years ago.

This could prompt people who had previously been hesitant to get an annuity for fear of missing out on higher rates in future to take the plunge and get one. The prospect of rate cuts in the coming months could act as a further incentive as falling rates could put pressure on the incomes providers can offer in the coming months.”