The Bank of England (BoE) has finally put the brakes on the relentless interest rate hiking cycle – holding at 5.25%.
Pausing rates – coupled with the news yesterday about inflation coming down, indicates greater conviction in the economy, and perhaps the end – or near end – of this 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 BoE announcement, the markets reacted, with implications for savers, mortgage borrowers and anyone considering an annuity.
As the market digested the latest news on inflation, 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 product rates tend to rise and fall with them. So, this could be good news for borrowers, but less positive for savers or those looking to take out an annuity.
However, this isn’t the full story, because the BoE 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 can act fast, and some comfort for those who can’t.
This article isn’t personal advice. If you're not sure what’s right for you, please ask about financial advice.
What does it mean for mortgages?
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 new fixed-rate mortgages. If lenders are going to the market for new fixed rates right now, the fact the market’s rate expectations have fallen could mean lower mortgage rates.
It means that anyone expecting to remortgage in the next six months might 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 the coming months.
If however, mortgage rates continue to fall, they can shop around when it’s time to remortgage and find a cheaper deal.
What does it mean for savings rates?
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 many, if any, rises for the next few years, so savings 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 might not be around for much longer. If you haven’t switched your instant or easy access rate for some time, it’s also worth shopping around as big high street banks have been slow to pass on rate rises.
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However, this isn’t time to panic, if your current fixed-rate deal doesn’t come to an end for a while.
The BoE’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.
So, while we could see some of the most competitive rates retreat, we’re not expecting dramatic drops in the immediate future.
Please note, inflation reduces the future spending power of your money. You also can't usually withdraw your money from fixed-rate savings until the term has ended.
What’s next for annuity rates?
Annuities have enjoyed renewed fortunes over the past two years as government bond (gilt) yields soared.
Back in September 2021, a 65-year-old with a £100,000 pension could expect to get an income of £4,941 a year from their annuity.
This then soared to more than £7,500 per year in the aftermath of the mini-budget, after which incomes settled down with the same person now able to get £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.
These figures are taken from our online annuity quote comparison tool covering the open market. All figures are for a single-life level annuity with a five-year guarantee built in. Annuity rates are based on your personal circumstances and the options you choose as well as the rates available at the time.
Today’s interest rate pause could cause long-term gilt yields to fall back. If this does happen, we could see providers opt to cut their annuity rates in the coming weeks.
Despite this, annuity incomes are still substantially higher than they have been for several years. And they should always be a factor for anyone looking for an element of guaranteed income in retirement.
