UK interest rates rise to 4.25% by Bank of England – what it means for annuities and mortgages

Interest rate expectations in the past week have ended with a 0.25 percentage point rise to 4.25%. Worries of the impacts of a rate rise on the banking sector meant many were expecting rates to stay the same. However, it turns out that for the Bank of England (BoE), inflation is still the priority.

Given, the surprise rebound in inflation, the BoE had little choice but to keep raising rates. And while you might well ask why shortages of cucumbers should mean higher monthly mortgage payments, even when volatile food and energy prices were stripped out, core inflation was also up from 5.8% last month to 6.2%.

This was enough to persuade the BoE that rising prices are more of a threat to the economy than the woes of handful of US and Swiss banks. It took the opportunity to underline yet again that the UK banking system remains resilient.

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What this means for mortgages

The impact the rate rise will have on mortgages owes a little to the fact that things were far less certain in the run-up to this rate announcement than they’ve been in recent months.

First we had the BoE talking up the prospects of more rate rises on the way. Then we had question marks over whether they would been keen to hike rates if it might undermine confidence in the banks. And finally inflation figures brought us back to square one, with the market firmly expecting a rise.

It means that while we’ve seen some small fluctuations in the past week, the banks weren’t entirely clear on the kind of change they were pricing in. So we could see a little more reaction than we have after previous rate hikes.

Now rates have risen, for variable rate mortgages, the changes are likely to be swift and horrible. For fixed rates, on the other hand, we’re not expecting this rise to have a significant impact on the overall downward trajectory of mortgage rates during this year.

The Bank is still confident that inflation will fall significantly after June. It actually expects that fall to be steeper now, especially now that gas prices are expected to be so much lower at that point. It means we can expect the rate hiking cycle to be near an end.

And depending on how far and how fast rates fall, we could see rate cuts on the horizon. This is what the banks will have in mind when pricing fixed deals, which will push rates down.

For those on variable rates, who are wondering whether to fix, it causes a bit of consternation. Holding on in a variable rate mortgage has proven increasingly expensive, and we can’t guarantee this is the last of the increases.

The Bank said the market expects rates to rise as far as 4.5% before dropping again. However, the longer you wait, the more of a chance there is that fixed rates will fall, so you could get a better deal at the end of it.

In the end it will come down to whether you can face the risk of more rises in the short term in return for a better deal further down the line. Some people will have the wiggle room and the nerve. Others need certainty over what’s likely to be their biggest monthly outgoing.

What this means for annuities

After years in the doldrums, annuities enjoyed a crazy ride in 2022 as incomes soared off the back of rising gilt yields. They hit a real high in the aftermath of the mini-budget before drifting slowly downwards and so far, this year they’ve remained fairly flat.

An interest rate increase could provide a boost to rates. However, there’s also the chance any increase has already been priced in given the Bank’s much publicised comments on the future direction of interest rates.

Incomes might have reduced from the dizzy heights achieved in the weeks following the mini-budget last autumn. But they remain much higher than where they were two years ago when record-low interest rates kept them pegged back. Ultimately, they offer significantly better value today than they have for years.

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This article isn't personal advice. If you're not sure what's right for your circumstances, seek advice.

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