We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us
  • A A A
  • UK interest rates rise to 5% – what it means for stock markets, mortgages and annuities

    Today the Bank of England raised the interest rate to 5%. Here’s how the markets reacted so far, and what it could mean for your mortgage and annuity rates.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    This article is more than 6 months old

    It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

    With the Bank of England (BoE) raising the base interest rate by 0.5% to 5%, here’s how markets have reacted, and what it could mean for mortgages and annuities.

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

    How have markets reacted?

    Susannah Streeter, Head of Money and Markets

    BoE policymakers are feeling the heat with inflation staying hot and sticky, which is why they’ve opted to super-size the rate hike, with a 0.5% increase to 5%.

    The decision has sparked a fresh round of turbulence on bond and currency markets. It’s affected the cost of government borrowing with two-year gilt yields falling back below 5%, then shooting back above recent highs to over 5.1% – a level we’ve not seen for 15 years.

    There’s still considerable uncertainty about how much further rates will go. Investors are trying to assess whether the bigger jump now, might be enough to stem further rate hikes or whether many more will still be necessary.

    The pound rose, before losing ground. More ups and downs are expected for the pound as the market assesses the impact of this hawkish move from the BoE.

    It’s not so much the stubborn headline rate of Consumer Price Index (CPI) which has prompted this move. The worries lie in the fact that that inflation-led wage increases are becoming embedded in the economy. This has already helped push up core inflation to a 31-year high of 7.1%, making it the outlier of advanced economies.

    There was dissent around the table, with two policymakers wanting to keep rates on hold and mind the gap, due to the lag effect of previous rate hikes.

    The majority clearly believed acting hard and fast now, has greater potential to shove the immovable consumer prices in the right direction, rather than opting for multiple smaller pushes.

    That’s not to say there won’t be more hikes to come, with the Bank stressing that if inflationary pressures persist, more tightening will be needed.

    There are glimmers of hope that a tighter path of monetary policy might not have to be trodden, with forward indicators already flashing that a larger drop in inflation is incoming.

    Producer input price inflation eased sharply in May to 0.5% from 4.2%, indicating pressures are easing further up the supply chain. These are prices that will be passed on at the factory gate and should make their way onto our shelves.

    The prospect of a downturn looming again, given the mortgage shock, could also help dampen down pay demands and reduce the risk of a wage spiral, only making things worse.

    What it means for mortgages

    Sarah Coles, Head of Personal Finance

    A punishing 0.5 percentage point hike to 5% was horrifying news for millions of mortgage holders.

    Variable-rate deals are likely to increase overnight, and there’s every chance it’s going to feed through into even higher fixed rates too. Anyone who was already worrying about a remortgage, might well be feeling a mounting sense of dread.

    Tracker rates rise with every BoE hike, and there’s a strong chance that most standard variable rates (SVRs) will increase too. There’ll be people whose fixed deals came to an end in the past six months or so who have switched onto a variable rate mortgage in the hope that fixed rates would fall. The fact that they’ve stayed so alarmingly high means this could be a very expensive strategy.

    Those on a fixed-rate mortgage are protected for now, but the threat of a remortgage will be keeping millions of people up at night. The problem isn’t just the most recent hike. It’s the fact the market is worried that inflation is so entrenched that we’re going to need even more rises in the coming months. It’s currently pricing in more base rate hikes, to just under 6% in March 2024 . Higher rate expectations are then priced into fixed-rate mortgages.

    Over the past month, new fixed rate deals have climbed alarmingly. On the morning of the announcement, the average two-year fixed rate deal hit almost 6.2%, while the average five-year deal, pushed over 5.8%. It’s not quite at the nightmarish 6.65% we saw in the aftermath of the mini budget, but it’s not a million miles away.

    There’s every chance that the fact that the Bank has delivered such a big hike will cement the market’s conviction that more rises are on the cards, which could filter through into even more painful rises in mortgage rates.

    Current rates are already streets ahead of what most remortgagers are currently paying – because most fixed for less than 2%.

    Someone moving a 25-year £200,000 mortgage from 2% to 6.2% could find their monthly payment rising around £465 to £1,313. Our research shows that more than nine in ten people could run into financial trouble with a rise of that size.

    However, there is some hope. While we’re very likely to see more rate rises, by pricing in so many, the market could be overdoing things. It takes time for rate changes to have an impact on inflation – and at a time when more than 80% of the mortgage market is fixed , it could delay the impact even further.

    Such a big rise today could provide such a shock to the system that inflation could start to retreat without us needing quite so many hikes. If we see signs of falling inflation or growing economic difficulties in the coming weeks, we could see the market become less convinced of so many future rate hikes. This could then feed into an easing of sky-high mortgage rates.

    Of course, there are no guarantees, and if inflation refuses to budge, we could see mortgage misery endure.

    What does the rate rise mean for annuities?

    Helen Morrissey, Head of Retirement Analysis

    One of the few benefits of soaring interest rates is the revival in fortunes of the annuity market. Often criticised as providing poor value for money, annuity incomes have increased rapidly recently – up well over 40% in the last two years alone.

    Interest rates are just one factor feeding into annuity rates, so we can’t say for certain that we’ll see further increases as a result of today’s increase. However, there’s a strong likelihood we will see incomes continue to climb in the coming weeks.

    And with more interest rate hikes expected for the rest of 2023, we could see annuities surge even higher throughout the year – of course there are no guarantees though and annuity rates could be higher or lower in future.

    If you need a guaranteed income in retirement, then annuities should always be a consideration.

    If you’re concerned about missing out on future increases by tying into an annuity today, you could always consider annuitising in slices throughout retirement. You don’t have to annuitise your whole pension pot at once.

    This means you can leave the remainder invested where it can continue to grow, and you potentially benefit from higher annuity rates later.

    Shopping around can help you get the best annuity 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.

    What you do with your pension is an important decision. The government's free and impartial Pension Wise service can help you understand your retirement options and we can offer you advice.


    Editor's choice: our weekly email

    Sign up to receive the week’s top investment stories from Hargreaves Lansdown

    Please correct the following errors before you continue:

      Existing client? Please log in to your account to automatically fill in the details below.

      This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


      Your postcode ends:

      Not your postcode? Enter your full address.


      Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.

      What did you think of this article?

      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

      Editor's choice – our weekly email

      Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

      • Latest comment on economies and markets
      • Expert investment research
      • Financial planning tips
      Sign up