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Interest rates hold firm for now – what it means for your savings, mortgages, and annuities

Two years on from the UK's first rate rise, we look at what's next for interest rates and what it will mean for the economy, annuities, your savings and mortgages.

Important information - 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.

Two years ago, the era of cheap money ended as the Bank of England (BoE) raised the base interest rate from 0.1% to 0.25%. The first in a painful series of hikes to try and drive down demand, and prices. The BoE announced today that the current rate of 5.25% would hold for now.

Inflation has been a hard nut to crack. It's been fuelled by the pent-up frenzy for goods and services after the pandemic, squeezed supply chains, and the shock of the Ukraine war. The BoE's tools for cutting down rampant inflation are blunt, so the financial pain has been unevenly inflicted.

Mortgage holders having to renew deals have cut spending. Landlords have felt the pressure, passing on costs to tenants already struggling with the rising costs of essentials.

Businesses who were used to low-cost loans have struggled and insolvencies shot up, especially after the surge in energy bills and wages. There were 2,315 official insolvencies in October, up around 64% compared to two years ago.

But thanks to piles of lockdown savings and with a third of homeowners mortgage free, lots of people have partly resisted rising costs. They've continued to spend and helped the economy escape a predicted recession.

Even so, retail sales volumes have fallen back, even as we've been forced to spend. Instead, it's been bumping along in stagnation mode, and is set for meagre growth going forward.

The UK's still in a tight spot and without bolder action to super-charge investment and the supply of goods and services, growth prospects don't look good.

With long-term borrowing costs shooting up so much, the government considers its hands tied in terms of jump starting the economy by taking on extra lending from investors. 30-year gilt yields rose to record levels in a quarter of a century in October – a dramatic increase from 0.93% in December 2021 to 5.11%.

Although they've dipped a little since, they're still hovering around levels not seen since the financial crisis in 2008.

The UK's still in a tight spot and without bolder action to super-charge investment and the supply of goods and services, growth prospects don't look good. Though the UK stock market's risen since the first interest rate hike, appetite for UK shares has stayed subdued, partly because of the economic outlook.

It's been another rollercoaster for the pound though, which took a big hit after the Trussenomics of the mini-budget in September 2022, falling to $1.07. It's recovered as plans for unfunded tax cuts were dropped, but sterling is still down against the dollar, compared to two years ago.

The fall has prompted a flurry of private equity takeovers, suggesting there's still significant value on the London Stock Exchange.

This article isn't personal advice. Unlike the security offered by cash, all investment can fall and rise in value, so you could get back less than you invest. If you're at all unsure, seek advice.

What have the interest rate rises done to savings?

The past two years has lifted savings rates out of the doldrums, to hit higher levels than we've seen for decades.

In December 2021, the average one-year fixed rate offered 0.31%, and the average instant access account just 0.11%. By October this year, the average one-year fixed rate had soared to 5.45% and the average instant access account to 2.76%.

The impact hasn't been felt across the board, because the high street banks have been horribly slow to pass on rate rises.

The smaller and newer banks, and cash savings platforms, worked harder for savers' money, but were hampered to some extent by the might of the giants.

In recent months, the FCA has leaned harder on the high street banks, so they're moving a bit further and faster.

The average instant access rate was 2.23% in July, which rose to 2.76% in October – despite the fact the base rate was only up 0.25 percentage points in that time.

The average instant access rate was 2.23% in July, which rose to 2.76% in October – despite the fact the base rate was only up 0.25 percentage points in that time.

This is undoubtedly better, but it's hardly a rate to write home about. On 4 December, there were 311 easy access accounts paying over 3%, 173 over 4% and 37 over 5%. It means the best rates are still reserved for those who are prepared to shop around.

The rise hasn't been in a straight line either.

Rate rises were very gradual in the early months, as savings accounts inched ahead of one another – trying not to get too far ahead of the pack and soak up too much cash at too high a price.

The mini-budget in September last year accelerated the rise. It wasn't as dramatic as the overnight hikes in the mortgage market, but the average one-year fixed rate rose from 1.48% in August 2022 to 3.09% in October 2022.

Rates rose from there to the latest October figure of 5.45%. However, we know this was around the peak, and they're likely to have fallen back a little since.

What have the interest rate rises done to mortgages?

We've seen nosebleed-inducing ups and downs in the mortgage market over the past two years.

They started at incredible lows, with most people on fixed-rate mortgages having fixed below 2%.

Unsurprisingly, mortgage rates responded more quickly to rate rises than savings, but they were still relatively sluggish in the early days.

However, the impact of the mini-budget was devastating for the mortgage market, with vast swathes of the fixed-rate market withdrawn entirely.

When they returned, they were at a much higher level, with the average two-year rate hitting a peak of 6.65% on 20 October 2022. They then fell back until the spring, as the market realised it might have over egged its rate expectations, and started to factor fewer in.

It was all change again at that point, when inflation was proving surprisingly sticky, so lenders started to price in more rises again.

The average two-year fixed-rate mortgage rose from 5.35% at the start of April to a recent peak of 6.85% at the start of August. As a result, Bank of England (BoE) figures show a big drop in mortgage approvals. As buyers hurried out of the market, prices fell.

Mortgage rates have dropped gradually since, with the average five-year and two-year rate falling below 6%.

However, we're still worlds away from where rates were before all this kicked off, and there's no expectation for us to get back there again in a hurry.

What have the interest rate rises done to annuities?

The past two years has seen a major revival in the fortunes of the annuity market. After being pushed aside by Freedom and Choice reforms, interest rates rose, incomes soared, and annuities stepped back into the spotlight.

A 65-year-old with a £100,000 pension can now get up to £7,147 per year from an annuity – a massive 44% increase on the £4,953 they could've got two years ago. Rates rocketed during 2022, hitting a high in the aftermath of the mini-budget. We generated this quote using our online annuity quote tool based on a £100,000 single life level annuity with a five-year guarantee built in, and paid in advance.

They've since fallen back a bit and settled down, but they still offer the best value they have for years. This is prompting more people to take a closer look at how they can include them in their retirement planning.

While we're likely to see intrigue in annuities persist for the time being, it's not a guarantee. Annuity rates could be higher or lower in the future.

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. If you're over 50 and you are not sure what's right for you, talk to the government's free and impartial pension service Pension Wise.

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. Remember, annuity quotes are also only guaranteed for a limited time and will vary depending on individual circumstances.

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Written by
Susannah Streeter
Susannah Streeter
Head of Money and Markets

Susannah is a key contributor to our content. She follows changes in monetary policy movements and fiscal policies closely to assess the impact on financial markets and economic growth, and has extensive experience in covering technology stocks and the retail sector.

Sarah Coles
Sarah Coles
Head of Personal Finance

Sarah provides insight and analysis to the media on topics such as savings and financial planning, and co-presents HL's ‘Switch Your Money On' podcast.

Helen Morrissey
Head of Retirement Analysis

Helen raises awareness of key retirement issues to help people build their resilience as they move towards their later life.

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Article history
Published: 14th December 2023