Rate rise preview: what it means for savings, mortgages, annuities and the economy

Hargreaves Lansdown provides their rate rise preview from their experts and what it means for savings, mortgages, annuities and the economy.

Key points:

• • What now for rates?
  • The impact on savings
  • What it means for mortgages
  • The impact on annuities

What now for rates? – Susannah Streeter, head of money and markets, says:

“With inflation still scorching and wages rising, there’s every chance the Bank of England won’t just raise interest rates at the next meeting, but will fire off further rounds of hikes in the months to come: the markets are expecting rates to hit around 5.5% at their peak.

“However, the path ahead is still clouded in uncertainty.

“The market may be over-estimating how many rate rises are in the pipeline.

“This is partly because the current reaction on markets could be doing the Bank of England’s job for it.

“The expectation that rates could head above 5.5% has seen the better mortgage deals whipped away, which will seriously weaken the spending power of the 1.3 million households having to re-mortgage this year.

“Government borrowing costs have spiked, reducing its spending arsenal ahead of any election.

“There is a chance that inflation will fall back much more quickly than the markets expect.

“There are also some signs of a turn in the tide when it comes to pay growth.

“Timelier PAYE data for May indicates that pay rose by just 0.3% month-on-month, still an increase of 7% over the year but lower than April’s snapshot.

“Plus data from the KPMG and REC UK Report on Jobs indicates that starting salaries for new recruits fell to a 25-month low in May.

“The voting split of the monetary policy committee will be watched closely, as an indication of how a decision could go in August and in the Autumn.

“At the point when the Bank of England chooses to press pause, immediate cuts in interest rates aren’t expected.

“Inflation is still likely to be a threat, partly because of the ongoing fight for talent across the labour market. Brexit is considered to have made this more acute, particularly for certain industries, such as healthcare.

“This has had a knock-on effect on another problem facing the economy – the high numbers of long-term sick, given that a lack of staff is likely to mean longer waits for treatment.

“With so many people too sick to work, jobs market tightness is expected to remain.”

The impact on savings – Emma Wall, head of savings, says:

“Healthy jobs figures on Tuesday have tipped the balance on interest rate expectations from the Bank of England next week – stronger-than-expected wage growth, and a record number of people in employment sets the scene for a quarter point hike to 4.75% from 4.5%.

“But while the market is currently pricing in several rate hikes, there are reasons to suggest they may not all materialise.

“GDP expectations for the UK may be positive but they are muted.

“The consumer is under pressure, mortgage rates are up, mortgage approvals are down, residential rental rates are rising at record speed – and that’s before you add crippling energy bills and near 20% annual inflation on food. Continually hiking rates eventually hurts more than it heals – intentionally tipping the UK into recession is not the Bank of England’s ‘Plan A’.

“The Bank also won’t want to be out of step with other developed market central banks.

“Predicting the direction of travel is difficult – unknown factors can always influence policy, but a key indicator is looking underneath the hood of the headline rate decision.

“How the individual members are voting gives guidance on the trajectory.

“There’s good news for easy access, and short-term rates where we have seen strong competition – 5% for a one-year fix is the new norm.

“Very recently there has been a burst of activity on some 2- and 3-year rates, since the jobs figures landed.

“The best three-year deal on the market hit 5.67% on Wednesday, and the best two-year rate hit 5.45%.

“On Tuesday, the average easy access rate paid 2.23%, and 24 hours later it paid 2.29%.

“Meanwhile the average one-year fixed rate rose from 4.27% to 4.41%, according to Moneyfacts.

“You currently get more for fixing for three years than for five. This is reflective of the mixed economic outlook, and the expectation that rates will rise for the short term but come down again in the future.

“For savers, this means it makes sense to lock in the rate rises while you can, as either recession or – here’s hoping – easing inflation, will soon mean they are a thing of the past.”

What it means for mortgages – Sarah Coles, head of personal finance, says:

“Tracker rates will rise with every Bank of England hike, and there’s a strong chance that most SVRs will increase too.

“For anyone who moved onto a variable rate mortgage in the hope fixed rates would fall, it’s proving an expensive strategy.

“Meanwhile higher rate expectations mean gilt yields have soared – the two-year gilt yield has risen higher than it did in the aftermath of the mini-budget.

“Higher rate expectations have been priced into fixed rate mortgages, which have risen quickly since inflation figures in May, and dramatically after jobs data on Tuesday.

“The average 2-year fix cost 5.75% on 13 June, and 5.9% just 24-hours later.

“Meanwhile the average five-year fix rose from 5.44% to 5.54%, according to Moneyfacts.

“We’ve seen HSBC raise rates twice in a week, and this won’t be the last of it.

“This has proven a nightmare for anyone going through a remortgage process. Mortgage deals are still a long way shy of the peak in October.

“However, they’re streets ahead of the rates most remortgagers are currently paying – because most fixed for less than 2%.

“Someone moving a 25-year £200,000 mortgage from 2% to 5.9% could find their monthly payment rising by more than a third, to £1,276.

“It would add over £400 a month to their bill – which our research shows could force 88% of people into financial difficulties.

“Recent Bank of England figures show the scale of mortgage arrears jumped almost 10% between the end of 2022 and 2033 to £14.9 billion, and this figure is only likely to grow.”

The impact on annuities – Helen Morrissey, head of retirement analysis, says:

“Annuity rates have continued to inch up in recent weeks with a 65-year-old with a £100,000 pension able to get up to £7,027 per year according to the latest data from HL’s annuity search engine.

“It’s some way off the dizzying heights we saw in the aftermath of the mini-Budget but it’s fair to say annuities have undergone a remarkable change in fortunes over the last two years.

“Back in May 2021, someone in the same position would get over £2,000 less income per year by buying an annuity.

“Interest rates are just one factor that helps determine annuity rates, so it is not a given that we will see a further bump – assuming we get a rate rise.

“However, there’s a strong chance we could see incomes increase further in the coming weeks.

“After years in the doldrums following Pension Freedom and Choice there are signs more people are considering annuities and their role in their retirement planning.

“Recent data from the ABI showed annuity sales surged 22% in the first three months of 2023 as more people look to secure a guaranteed income.

“Annuities should always be a consideration when people need to secure a certain level of income to meet their needs, but many were put off by the low rates on offer.

“It’s a huge positive to see more people are taking advantage of the extra value annuities are offering right now.”

 

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay