Why the Bank of England is set to pause, and what it means for you
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “With inflation ticking back up in December, it’s likely to have quelled immediate urges from policymakers around the table for rate cuts any time soon. Given the ultra-cautious stance three of the nine members of the MPC have taken towards inflationary risks, having voted for a rate hike at the last meeting, the chances of a reduction in the base rate at this gathering look very slim indeed.
Growth has been looking stagnant, and it’s likely the economy tipped into a very mild recession at the end of 2023, with companies and consumers more cautious in their spending patterns. But business activity has a bigger spring in its step since the start of the year, adding to hopes of resilience ahead. The latest PMI snapshot for the UK was encouraging showing an expansion in January.
Policymakers will also have their ears attuned to the rumours swirling about the potential for tax cuts and duty freezes in the budget, election sweeteners which could see demand in the economy tick up.
The impact of delays to imported goods re-routed from the Red Sea is still uncertain, and could tip some prices upwards. Underlying price pressures are showing signs of easing, with high wage growth dropping back a little, but still threatening to stay hotter than the Bank of England wants to see.
There remains plenty of known unknowns and so policymakers overall are likely to again sit on their hands and await further data, keeping rates on hold at 5.25%. But if one or two more policymakers opt for a holding stance or a cut, it’s likely to fuel sentiment in the markets that a reduction in painfully high interest rates could still come from the middle of this year.”
What it means for savings
Sarah Coles, head of personal finance, Hargreaves Lansdown: “Savings rates have continued to drop, because while December’s bump in inflation may have persuaded the market there might be slightly fewer rate rises during 2024, it hasn’t shifted the conviction we’re set for a rate cut in the coming months, and several more during the year.
It’s so sure of this that the best one-year fixed rate savings deal has now dropped below the best variable one, as banks price in the rate cuts they’re expecting. Whether things play out exactly as they expect is another matter entirely, but when it comes to pricing savings accounts, it’s what the banks assume that matters right now.
Variable deals place their weight on the Bank of England rate today, which is why the average hasn’t shifted in a month. The fixed rate deals focus on what the rate is likely to be like throughout the fixed period, which is why they’ve fallen quarter of a percentage point in a month.
If you don’t need the cash for a year or more, you may be tempted to hold it in a variable rate account for a higher return in the short term. However, in the coming months, there’s a very high chance that rates will fall, so if you don’t need the cash right now, fixing and guaranteeing the return for a year or more may well prove more rewarding. These 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 great rates worth snapping up while you can.
What is means for mortgages
Competition in the market remains fierce. Mortgage rates have fallen significantly from a recent peak for the average 2-year rate of 6.85% at the start of August 2023, to 5.58%. A major chunk of the drop has taken place over the past month, when average 2-year rates fell almost half a percentage point.
December’s bump in inflation dented market confidence about the number of rate cuts that could be on the cards for 2024, and there has been a muted reaction in the mortgage market, most strikingly Santander’s decision raise rates 0.2 percentage points.
If you have a remortgage looming, or you’re planning to buy, and this has struck fear into your heart, then the good news is that this isn’t expected to be enormously widespread, and the general direction of travel 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 the exception to the rule right now.
However, even at current rates, a remortgage from a fixed rate deal of less than 2% is going to be painful. You have a few options. You can opt for a tracker rate, which will drop when the Bank of England cuts rates, but there are no guarantees over when or how far rates will fall. If certainty is your priority, you can lock in a fixed rate deal now – up to six months before the remortgage is due. If rates fall from here, you can ditch the deal and shop around. However, if there are any nasty surprises that push rates up again, you’ve secured a fixed rate bargain.
If you’re struggling with affordability, it’s worth talking to your lender, who’ll have more options at their disposal – including moving to interest-only for a period, extending the length of the loan or even taking a payment holiday. Some of these will have an impact on your credit record, but will do far less damage than missing payments.”
What it means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Annuity rates have settled down over the past year and a decision to keep interest rates steady next week should see this period of relative calm continue. Data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension could get up to £6,923 per year from a level annuity at the moment. This is some way off the £7,586 peak seen in October 2022 but far higher than the £4,626 they would have got just three years ago.
The fact remains that annuities are currently offering the best value they have in years, and this is prompting increased interest from people looking to secure a guaranteed income for life. The prospect of interest rate cuts as we go through 2024 may fuel further interest in securing an annuity now in case Bank of England cuts push bond yields down resulting in a fall in annuity income.”
