Inflation set to rise, while Bank of England holds steady
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Inflation looks likely to have bubbled up again in November, dashing hopes that more heat will be taken out of borrowing costs. The CPI reading looks set to veer further away from the Bank of England’s target and come in around 2.6%, up from 2.3% in October.
Higher tobacco duties and energy bills will be taking a toll. Our desire for travel has been sending airfares soaring, and with grocery price inflation also heading upwards again, policymakers are once again having to deal with a hotter mess of prices.
However, some of these effects had already been forecast by the Bank of England, and so they may not move the dial too much in terms of interest rate expectations. The Bank has already said it’s less concerned about inflation driven by external factors, and more focused on whether it feeds into more domestically-powered inflation – through higher wages.
It’s still unclear if the higher National Insurance employer contributions announced in the Budget will show up in lower pay growth, or higher prices charged to consumers. The impact of Trump’s planned tariffs, will also be watched closely. Although a stronger dollar could push up the cost of imports, there’s a chance that global manufacturers could cut prices to stay competitive.
There’s a lot of ‘what ifs’ around right now, so it won’t be at all surprising if the Bank sits on its hands next week and adopts a ‘wait and see’ approach. This is reflected in financial markets’ expectations, with an 88% probability of no change to the base rate next week being factored in.”
What this means for savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown: “Savers could be forgiven for wondering why they didn’t see much of a change in savings rates after inflation data came in higher than expected a month ago. Instead, in the 1-year fixed rate market, they got more competitive rates pushing up very slightly from 4.75% to 4.80%, and the average rate actually falling very fractionally from 4.19% to 4.18% in a month (Moneyfacts). The lack of significant movement in either direction means that if you still haven’t got round to fixing the savings you don’t need for a year or so, there’s still time to lock in a decent deal.
Unsurprisingly, easy access rates have dropped, reflecting last month’s cut in the Bank of England base rate. We can expect these to continue to inch down, so savers need to be prepared to switch for a better deal if their bank takes an axe to their rate. It can be tempting at times like this to think it’s too much bother, but with the average at 2.9% and the best rates still offering close to 5%, it’s worth it. Plus, if you use a cash savings platform you can move between savings accounts from different banks without having to complete new forms or prove your identity.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “With the Bank of England set to press pause on any interest rates cuts, we can expect the annuity market to remain settled. We’ve seen annuities delivering great value over the course of the year, off the back of higher interest rates, and this has led to a bumper year for the market. The prospect of interest rate cuts in the New Year could well push these incomes down, but when these cuts come, they will not happen anywhere near as sharply as they did when interest rates were raised. We also are unlikely to see interest rates fall to the levels that we had. These factors should help support annuity incomes and tempt more people on the hunt for a guaranteed income in retirement to take the plunge.”
What this means for mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown: “A small bump in inflation and no movement from the Bank would be unlikely to frighten the horses in the mortgage market, because both are so widely expected. Higher-than-expected inflation, or comments from the Bank of England that make rate cuts seem more of a distant prospect, could mean more misery for mortgage borrowers. In either case, we wouldn’t expect massive movements, but even small changes can make all the difference to remortagers and buyers on the edge of affordability.
New fixed mortgage rates tend to react fairly quickly to surprises, because it’s a competitive market with small margins, so they reflect any repricing at speed. As a result, they rose after inflation came in higher than expected a month ago, and then fell back a little after Andrew Bailey emphasised that the Bank still expects to cut rates gradually next year.”
