Bank of England pauses rates – and the market expects it to last

LONDON (Capital Markets in Africa): The Bank of England maintained rates at 4.75% as expected. The committee voted 6-3 to keep rates on hold, with three voting for a cut. What this means for annuities, what this means for savings, and what about mortgages?

Susannah Streeter head of money and markets, Hargreaves Lansdown:
“There’s a chill spreading just before Christmas, with interest rate cuts on ice, and cold water being thrown on hopes for a rapid reduction in rates next year. The decision to keep rates on hold had been widely predicted, given that inflation has veered further away from target, but it did little to calm the jittery sentiment on the markets. The FTSE 100 stayed deep in the red, while the pound started to slide again against the dollar, trading at $1.26.

The door is still open to cuts however, as this was not a unanimous decision, with three members of the committee voting for another 0.25% rate cut. However, they are expected to be fewer and far between next year, with the markets pricing in just two interest rate cuts.

The Bank of England is ringing in the same discordant notes of caution as the Federal Reserve. The Fed’s guidance yesterday of just two further interest rate cuts next year sparked nervousness and a wave of sell-offs, and the Bank’s decision has done little to provide much cheer. We are seeing tighter scrooge like policy returning from central banks, who remain cautious about inflationary risks ahead – fresh tariffs from Trump are looming and in the UK the effects of the Budget changes on prices still hard to calculate. Nevertheless, with the UK economy contracting, and inflation still more likely than not to head back down towards target next year, we’re still on the rate-cutting track but the inclement economic weather means we are on go-slow. This could be good news for savers and those looking for an annuity, but bad news for mortgage borrowers.”

The impact on annuities: Helen Morrissey, head of retirement analysis, Hargreaves Lansdown
“There were no surprises from the Bank of England today, who opted to hold rates, with the expectation being that further cuts will come very gradually. This signals good news for the annuity market as this will help incomes remain steady. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,281 per year from a single life level annuity with a five-year guarantee. This is not much lower than the £7,586 top rate available in the aftermath of the mini-Budget, so annuities are still offering great value for money and will prove a tempting prospect for people on the hunt for a guaranteed income in retirement.

If you are in the market for an annuity, then it’s hugely important to search the market to get the best product for your needs. Quotes can differ between providers and opting for the first one could leave you thousands of pounds worse off in retirement. Adding in extra information around health and lifestyle can also mean you get an increased income. It’s well worth taking the time to use an annuity search tool to see what’s out there.”

Savings: Sarah Coles, head of personal finance, Hargreaves Lansdown
“The Monetary Policy Committee effectively shut up shop early for Christmas, keeping rates on hold, and the market is expecting the shutters to remain firmly closed to rate cuts for longer in 2025 too.

Things don’t move in a tremendous hurry in the easy access savings market, so we’re still seeing the impact of last month’s rate cut feed through into very gradual reductions in a number of accounts. The repricing within the markets in recent days may halt the cuts for a while, and we’ve also seen the reappearance of one account offering 5%. However, overall, rates are still on their way down.

Fixed rates are likely to be more responsive, and we’ve already seen them start to creep up as banks price in expectations of rates staying higher for longer. There should be some fairly interesting deals on offer in the coming days, so anyone with money they want to fix for a period, should consider taking advantage while they can. It’s worth checking online banks and savings platforms, where rates tend to be much more competitive than the high street giants.

Mortgages
There’s a double-blow for those on tracker rates – who won’t see their monthly payments drop in December, and can expect to wait longer in 2025 before rate cuts materialise too. There will be those who switched to a tracker at the start of 2024, who will have expected a raft of rate cuts by now, so the idea of just two in 2024 and as little as two in 2025 will be a major disappointment.

For those looking for a fixed rate deal, the fact the market is pricing in fewer cuts between now and the end of 2025 means we’re likely to see mortgage rates rise slightly from here. Mortgage rates have fluctuated over the past month, as the market struggled to make its mind up about the path of future rate cuts. With so much uncertainty around, it can be a good idea for anyone with a looming remortgage to secure a rate now. If rates rise in the interim, they’ll have locked in a cheaper deal, but if they fall, they can shop around for something cheaper.”