Interest rate expectations soar – what it means for savings, annuities and mortgages

The market’s knee-jerk reflex is in top notch condition. Yesterday’s horrible rise in core inflation tapped it on the sweet spot, and we’ve seen interest rate expectations shoot up to around 5.5%.

We can’t rule it out, but there’s a reasonable chance this is an over-reaction.

Fortunately, if you’re in the market for savings or an annuity, it could boot the market in the right direction. For those hunting for a mortgage, meanwhile, it’s more of a kick in the teeth.

UK inflation falls, but what’s next for interest rates and the economy?

Interest rate expectations

Emma Wall, Interim Head of Active Savings

Persistent inflation makes it highly likely we’ll get another rate rise at the next Monetary Policy Committee (MPC) meeting in June. Where rates go from there though is less clear.

The US Federal Reserve (Fed) has indicated it’s pausing rate hikes, and Europe isn’t giving off signals of great hikes either. Given how intertwined our markets are, it’s unlikely we see the Bank of England (BoE) swim against the tide.

Instead, we think they’re likely to follow the Fed's 'pause not pivot' mantra. Therefore, while we might not see rate cuts before 2024, it’s unlikely there will be big hikes in the pipeline post June.

What does this mean for savings?

The savings market isn’t priced according to what’s going to happen, but what the banks think will happen. Much higher rate expectations have fed through into swaps markets, which means fixed rates are on the rise. We’ve seen a great deal of repricing, and some really attractive fixed rates – especially in the one-year market.

Given all the talk of more rate rises in the coming months, you could be tempted to wait to see how high rates will go. However, you’ll be taking a risk. If the market is over-reacting, we might not see rates go much higher in the coming months.

It’s worth checking the rates on the market right now. You might find they’re attractive enough that it’s not worth taking that risk.

Active Savings gives you online access to a range of fixed-term savings products across lots of banks and building societies.

You'll have a choice of competitive rates (often far higher than the big high-street banks) and opening new products is easy and takes just a few clicks.

You'll see everything together in one place when you log in, alongside any other HL accounts you hold with us – making things easier for you.

Explore Active Savings

What does this mean for annuities?

Helen Morrissey, Head of Retirement Analysis

An annuity allows you to swap some, or all, of your pension for a regular income that’s guaranteed to be paid for life.

Annuities have been a major beneficiary of the interest rate hiking cycle so far, with incomes rising to the best levels seen in over a decade in recent months.

It’s not a foregone conclusion that annuity incomes will rise off the back of any further expectations for interest rate rises, but it’s a distinct possibility.

Annuities have an important role to play in helping people secure a level of guaranteed income for retirement. However, for many years people have been put off by the low incomes on offer. With these incomes rising so much over the past year, now could be a good time to consider whether an annuity is right for you.

Shopping around can help you get the best deal. If you’re 55 or over, you can compare quotes from all UK annuity providers on the open market with our online tool. The options you choose can impact the annuity income you get. Consider your options carefully as once your annuity is set up it can’t be changed.

Get an annuity quote

If you’re not sure if you’re making the right decision for your circumstances, the government’s Pension Wise service offers free and impartial guidance – and we can offer you financial advice if you’d like it.

Find out more about financial advice

What does this mean for mortgages?

Sarah Coles, Head of Personal Finance

For those waiting and hoping for fixed mortgage rates to fall, there could be a lot more waiting and a lot less hope.

Rising swap rates mean fixed-rate mortgages will be pushed higher in the short term. Meanwhile, concerns about the stickiness of inflation are likely to mean we won’t get BoE cuts this side of the new year. That means mortgage rates are unlikely to head south as fast as people were hoping. Anyone waiting it out on a variable rate, meanwhile, will be paying a higher price for longer.

If you’re looking for a fixed-rate mortgage right now, this is horrible timing, because the market is likely to be running hot in the short term. There’s the hope that over time, this proves to be a spike, but there are no guarantees.

It leaves you with the option of fixing at a higher rate than planned, opting for a variable rate in the hope fixes will come down, or holding off until the picture is clearer. None of these are ideal – and none are brilliant indicators for the property market either.

This article isn’t personal advice. If you’re at all unsure, seek advice.

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The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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