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Interest rates hold steady at 5.25% – what it means for savings, mortgages, and annuities

The Bank of England have held rates at 5.25% for the fourth consecutive time. We look at what that means for investors.

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.

The Bank of England (BoE) has held the base rate at 5.25% for the fourth time in a row.

With inflation ticking back up to 4% in December, it’s likely any immediate urge from policymakers to start cutting rates was cooled. But, right now, all attention is on the mood music from the BoE not just the rate decision. There was a slight shift in sentiment around the table. Instead of three decision makers voting to increase rates again, two voted for a rate rise and one for a cut.

Interest rate cuts are still being eyed for this year, but it appears they’ll take a bit more time to flush out. The BoE still thinks monetary policy would have to ‘remain restrictive’ for ‘an extended period of time’ until inflation is ‘sustainably’ at 2%.

The broader economic picture looks like it’s adding weight to the argument for cuts. Growth looks stagnant, and it’s possible the economy tipped into recession at the end of last year, with companies and consumers spending more cautiously.

But it’s not all doom and gloom. Business activity has a bigger spring in its step since the start of the year, adding to hopes of resilience ahead. The latest Purchasing Managers’ Index (PMI) snapshot for the UK was encouraging, showing an expansion in January.

And with rumours swirling about potential tax cuts and duty freezes in the budget, we could see demand in the economy ticking up.

On the other hand, the impact of delays to imports coming via the Red Sea is still uncertain and could lead to price increases. Some price pressures are showing signs of easing, with high wage growth dropping back a little, but still potentially staying hotter than the BoE would like.

Policymakers overall are likely to sit on their hands and wait for more data before cutting rates from their current highs.

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

What does a steady interest rate do for savings?

Mark Hicks, Head of Active Savings

Savings rates have kept dropping. December’s bump in inflation might have persuaded the market that there will be slightly fewer rate rises in 2024, but most are still expecting a rate cut in the coming months, and more during the year. Even if we haven’t had one this time around.

The market is now so sure of this that the best one-year fixed rate deal is below the best variable rate one. Whether things play out exactly as they expect is another matter, but when it comes to pricing savings accounts, it’s what the banks think that matters.

Variable deals depend on the BoE rate right now, which is why the average hasn’t shifted in a month. Fixed rate deals focus on what the rate is likely to be throughout the fixed period, which is why they’ve fallen 0.26% in a month.

If you don’t need the cash soon, it might be tempting to keep it in a variable rate account for a higher short-term return, but we think rates are likely to fall in the coming months.

So, if you don’t need the cash right away, fixing and guaranteeing the return for a year or more might be more rewarding. But remember, nothing is guaranteed, and the rates might not fall as soon as we expect and could even go higher.

Fixed rates have fallen, but there are still plenty of deals over one and two years offering more than 5% right now. So there are still great rates out there worth snapping up.

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What interest rates mean for mortgages?

Competition in the market is still fierce.

Mortgage rates have fallen significantly from a recent peak for the average 2-year rate of 6.86% at the start of July 2023, to just over 5.5%. A major chunk of the drop has taken place over the past month, when average 2-year rates fell almost half a percentage point.

There’s been a muted reaction in the mortgage market to the December inflation bump, most strikingly Santander’s decision to raise rates 0.2 percentage points.

If you have a remortgage looming, or are planning to buy, then the good news is that this isn’t expected to be widespread. The general direction for rates in the coming months is still likely to be downwards. The Santander announcement came sandwiched between cuts from Barclays and Nationwide, so it’s an exception right now.

But, even at current rates, a remortgage from a fixed rate deal of less than 2% is going to be painful.

There are still a few options though. You can opt for a tracker rate, which will drop when the BoE cuts rates, but there are no guarantees when or how far rates will fall.

If you want more certainty, you can consider locking in a fixed rate deal now – up to six months before the remortgage is due. If rates fall from here, you can ditch that deal and shop around, but if there are any nasty surprises and rates start pushing rates higher, you’ve secured a fixed rate bargain.

If you’re really struggling to afford your mortgage, it’s worth talking to your lender. They could have more options at their disposal – like moving to interest-only for a short period, extending the length of the loan or possibly taking a payment holiday.

Some of these will have an impact on your credit record, but might do far less damage than missing payments. All these options should be carefully thought through before committing.

What is the impact on annuities?

Annuity rates have settled down over the past year and the decision to keep interest rates steady should see this relatively calm period continue.

A 65-year-old with a £100,000 pension could get up to £6,923 per year from a level annuity right now. This is some way off the £7,586 peak in October 2022, but higher than the £4,626 they would have gotten just three years ago. This quote was generated from 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.

Even with the drop, annuities are still offering the best value they have in years. And this is prompting increased interest from people looking to secure a guaranteed income for life.

Potential interest rate cuts as we go through 2024 might make securing an annuity now more attractive. This is in case the cuts push down bond yields and cause annuity income to fall.

Shopping around could 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, or consider our financial advice.

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, rates change regularly and quotes 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.

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Article history
Published: 1st February 2024