Interest rates set to stick, while inflation drops: what it means for you
Inflation figures are out on 19 June and the MPC meets on 20 June to set interest rates.
What we’re likely to see
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “There are high hopes that one of the darling buds of May unfurling last month was inflation finally hitting its target. After a disappointing reading in April, which saw the CPI index frustratingly hover elusively above 2%, disinflationary pressures are expected to have helped push prices down further.
The effect of unemployment ticking up to 4.4% in April may have made some workers more cautious in their spending patterns. That certainly showed up in the latest economic growth figures, which showed activity in the retail sectors slowing sharply. May was warm but wet, which may have continued to affect demand.
The last time inflation stood at 2% was in the run up to the Euros in July 2021, as pent-up demand was unleashed while pandemic restrictions eased. As fans prepare to toast the tournament once more, seeing inflation finally return to target might be seen as a reason to put out more bunting, given how painful the cost-of-living crisis has been.
But it doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count. However, a cut in August is still a very real possibility.’’
The impact on savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown: “The Bank of England’s anticipated inaction is great news for savers, and with rates expected to stay higher for longer, the savings market is managing to hang on to rates above 5%.
The Cash ISA market is still the space for the highest interest rates on offer, with lots of new entrants into the market, predominantly from cash savings platforms. However, easy access rates and fixed term savings accounts are staying relatively steady too, so there’s still rich pickings for savers.
With Inflation still likely to be falling, savers should capitalise on the opportunity to earn a guaranteed rate of return that’s almost double the rate of inflation right now.”
What it means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Inflation is expected to continue its downward slide, spelling good news for those who’ve really had to make their incomes stretch. Despite this, an interest rate cut is still not expected this month, which could prove beneficial for those in the market for an annuity.
Annuity incomes continue to ride high – recent data from the HL annuity search engine shows a 65-year-old with a £100,000 pension could get an income of up to £7,222 per year. The expectation is that once the Bank of England starts cutting rates then we could see these incomes start to fall. However, with a cut not expected to come until after the election, this could prompt people who have sat on their hands up until now to finally take the plunge.
Purchasing an annuity is a major decision, as once bought they can’t be unwound. This can cause hesitation, for fear of missing out on a better rate later on. However, you are under no obligation to annuitise your entire pension in one go. Instead, you can choose to annuitise in stages throughout retirement securing higher rates as you age. As you get older there’s also the increased likelihood of qualifying for an enhanced annuity, which can push your income up further.”
How it affects your pocket
Sarah Coles, head of personal finance, Hargreaves Lansdown: “When inflation eases, it can be hard to spot the improvement. Things are just getting worse slightly more slowly than before. You’re also living with all the damage done earlier. Inflation is cumulative, so just because food inflation fell to 2.9% in March, it doesn’t take away the fact that a loaf of breads that cost £1.08 in April 2021 cost £1.40 in April this year – up almost a third.
The good news is that average wages are rising faster than inflation right now, and those on higher incomes are finding new breathing space to cover these higher costs. However, these pay rises haven’t been distributed evenly. People on lower-than-average incomes, and those who are out of work, are still facing horrible hardships. It’s why the HL Savings & Resilience Barometer update in May revealed 1.8 million people are behind on bills or debt repayments, and they have just £30 left at the end of the month to try to work their way out of this financial black hole.
How mortgages are affected
Mortgage misery is set to endure, as the Bank of England sits on its hands. The swaps market has moved recently, because it’s expecting higher rates to endure for longer, so banks are paying more for their fixed rates, and are passing this onto borrowers. We’ve seen fixed rates from the high street giants rise, and Moneyfacts says the average two-year fixed rate is now 5.97% – the highest since the middle of December last year.
RICS figures have revealed that this has already hit the property market, with fewer people looking for a new home and fewer sales agreed. With so many new properties still flooding onto the market, it means agreed prices are on their way down too.
The good news is that this shouldn’t endure for too much longer. The market isn’t fully pricing in a cut until November, but it may have gone too far. An August cut isn’t out of the question, so if the data starts to point towards an earlier cut, we could see rates pull back in the coming weeks and months.
The HL Savings and Resilience Barometer found that those who have remortgaged on a significantly higher rate are reeling from a horrible impact. At the moment, around 26% of mortgage holders spend a quarter of their after-tax income on the mortgage – which is when they’re considered to be at risk of missing mortgage payments and falling into arrears.
For those needing to remortgage right now, the temptation will be to opt for a variable rate in the hope it starts to fall soon. However, if the past six months has taught us anything, it’s how difficult it is to predict rate cuts, so if you take this option you need to be aware of the risk that rate cuts don’t kick in until almost the end of 2024.”