Yahoo Finance Interest rates: What Bank of England's decision means for your finances
The Bank of England has kept interest rates in suspended animation again, holding at 5.25%. This is highly likely to be the peak, which has implications for anyone saving, borrowing or considering buying an annuity in retirement.
The Bank is fairly confident that inflation is under control – at least for now. In the forecasts published alongside the announcement, it said Rishi Sunak’s target to halve inflation by the end of the year was in sight – forecasting it would hit 4.75% in the last three months of 2023. From there it’s expected to keep dropping - to 4.5% in the first three months of next year and 3.75% in the following three months.
It’s also forecasting more weakness in the jobs market. It now expects unemployment to rise to 4.3% in the last three months of this year, hitting 4.7% a year later, 5% the year after that and 5.1% by the last three months of 2026. This isn’t just higher than it previously expected, the rises are expected to go on for longer too. This may well depress wage rises, and while that comes with a whole host of downsides for all of us, it will ease any pressure for rate rises.
If these things materialise, the Bank is confident that 5.25% is enough to keep a lid on inflation. However, this doesn’t mean rate cuts are on the cards in the near future. It expects to start cutting in the second half of 2024, and then to do so slowly, so rates average 5.1% in the last three months of next year and 4.2% by the same period of 2026.
Read more: Bank of England holds interest rates at 15-year high
Mortgages
This rate pause was widely predicted and has been priced into both savings and mortgages, so we’re not expecting any seismic changes. Tracker mortgages will hold steady, because they follow the Bank of England. Fixed mortgages, meanwhile, may get slightly cheaper.
Fixed deals tend to focus mainly on rate expectations. If this pause persuades more people in the market that we’ve seen the last of the rate rises, fixed deals could fall a little further, but it’s only likely to be fractional.
If your fixed deal is coming to an end, you have a couple of options. You might opt for a variable mortgage – expecting monthly payments to hold steady for months, and then drop. However, there are no guarantees, so surprisingly stubborn inflation could force an unexpected rate rise, and push your payments up. If certainty is vitally important to your finances, you might opt for a fixed deal – accepting that in return for the certainty that your monthly payment won’t rise, you pay the price that it can’t fall until the end of the fixed period either.
Savings
This may be the peak for Bank of England rates, but we’re already past the peak for savings. You can still secure an easy access deal at more than 5%, but in many cases, you’ll have to be prepared to accept restricted access – which means you can only get your hands on your money a certain number of times a year.
Fixed rate savings are already getting less generous, but the good news is that this is happening very slowly. The market is expecting the Bank of England to hold rates higher well into next year, and even then, cuts are likely to be slow and gradual. It means they’re not in a hurry to whisk decent deals away, and you can still secure the kinds of returns we haven’t seen for more than a decade.
There is always the chance that inflation surprises on the upside, and savings interest increases. However, at the moment, this is more of a possibility than a probability, so it’s not worth banking on.
Read more: What to do if a remortgage is looming
Annuities
Like savings, annuity rates tend to rise at the same time as the Bank of England. It’s why after such a long time in the doldrums, annuities are offering the best value in years. This is great news for anyone who needs some guaranteed income in retirement.
The pause in interest rates will help keep annuity returns higher, as will movements in the bond market. Around the world, bond prices have fallen, so bond yields have risen. It’s these yields that drive annuities, so while they’re riding high, we can expect the annuity market to keep delivering.
Watch: Bank of England keeps rates the same again
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