Knee-jerk rate expectations boost savings and annuities but are a blow for borrowers

Sarah Coles, head of personal finance, Emma Wall, interim head of active savings, and Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, comments on the published inflation rate, showing knee-jerk rate expectations boost savings and annuities but are a blow for borrowers.

Key points:

• • Yesterday we heard that core inflation had risen to 6.8%, raising interest rate expectations.
  • The swaps market is pricing in three or possibly four more rate rises to a peak of around 5.5% – up from 4.8% at the end of last week.
  • We have already seen a raft of savings rates reprice in the aftermath.
  • An expectation of higher rates for longer means we should see savings rates rise and annuities increase. Unfortunately, it’s also likely to feed into mortgage rates.

Sarah Coles says:

“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 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.”

Rate expectations – Emma Wall says:

“Persistent inflation makes it highly likely we will get another rate rise at the next MPC meeting, but I would be cautious about the outlook from there.

“This is a single data point. It’s a powerful one, but it’s a drop in the ocean compared to the swell of recessionary indicators across the developed world.

“The Fed has indicated it is pausing rate hikes, and Europe is not giving off signals of more rises.

“Given how intertwined our markets are, I don’t see the Bank of England swimming against the tide.

“Instead we are likely to follow the Fed’s ‘pause not pivot’ mantra.

“Therefore, while we won’t see rate cuts before 2024, I wouldn’t bet on big hikes in the pipeline post June.

“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 may be tempted to wait to see how high rates will go.

“However, you need to be aware you’ll be taking a risk.

“If the market is over-reacting, we may not see rates go much higher in the coming months. It’s worth checking the rates on the market right now.

“You may find they’re attractive enough that it’s not worth taking that risk.”

What this means for mortgages – Sarah Coles says:

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

“Rising swaps 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 Bank of England cuts this side of the New Year, so 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 is 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.”

What this means for annuities – Helen Morrissey says:

“Inflation is proving a tricky beast to tame with the expectations of further interest rate rises growing.

“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 is a distinct possibility.

“Annuities have an important role to play in helping people secure a level of guaranteed income for retirement but for many years people have been put off by the low incomes on offer.

“It is hugely positive to see how these incomes have risen over the past year which will prompt people who may have been hesitant before to take a closer look.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay