Bank of England puts the brakes on: Investments, Savings, Annuities and Mortgages

The Bank of England has finally put the brakes on the relentless rate hiking cycle. A rise had been heavily pencilled in but was wiped off the board by the surprise fall in inflation. Even before the announcement, the markets reacted, with implications for savers, mortgage borrowers and anyone considering an annuity.
As the market digested the news that inflation had come down, it decided a rate rise wasn’t so likely after all. As a result, bonds started to look comparatively attractive, so money flowed into them, bond prices rose, and yields fell. Yields are important here because fixed rates tend to rise and fall with them. So, this could be good news for borrowers, but less positive for savers.
However, this isn’t the full story, because the Bank of England made it clear that it’s still locked in a fight against inflation. Rates could go up again in future, and at the very least are expected to hold at this level for a significant period until inflation is under control. It means we’re not expecting seismic shifts, so there are opportunities for those who act fast, and some comfort for those who can’t.

Mortgages
The pause in rate hikes is immediately better news for anyone with a variable rate mortgage, who can finally see their monthly mortgage payment hold steady for a month. Of course, there are no guarantees that this is the end of it, but they can at least take a breath.
There are also positive signs for fixed rate mortgages. If lenders are going to the market for new fixed rates right now, the fact that the market’s rate expectations have fallen could mean lower mortgage rates. It means that anyone expecting to remortgage in the coming months may want to check the market, to see what’s available. If they can lock in a lower rate now, they will have secured a better deal if mortgage rates rise in future. If, however, mortgage rates continue to fall, they can shop around when it’s time to remortgage and find a cheaper deal.

Savers
This is likely to be the top of the savings market, at least for now. Now that rate rises have paused, banks won’t be pricing in higher rates during the fixed period, so rates will settle, and are likely to fall.
If you’ve been waiting to fix near the top, it’s worth getting your skates on. The very best deals may not be around for much longer. If you haven’t switched your easy access rate for some time, it’s also worth making a move while there are some really attractive rates on the market.
However, this isn’t time to panic. If your current fixed rate deal doesn’t come to an end for a while, don’t lose faith. The Bank of England’s insistence that the fight against inflation is ongoing means we could see more rises further down the line, and at the very least is likely to mean it keeps interest rates higher for a considerable period. It means that while we may see some of the most competitive rates retreat, we’re not expecting dramatic drops in the immediate future.” 

What next for annuity rates?
Annuities have enjoyed renewed fortunes over the past two years as gilt yields soared. Back in September 2021 a 65-year-old with a £100,000 pension could expect to get an income of up to £4,940 a year from their annuity. This then soared to more than £7,500 a year in the aftermath of the mini-Budget, after which incomes settled down with the same person now able to get up to £7,317. Compared to the picture just two years ago this is a huge increase that can make a material difference to someone’s retirement planning.
Today’s interest rate pause could cause long-term gilt yields to fall back and if this is the case, we may see providers opt to cut their annuity rates in the coming weeks. Despite this, annuity incomes remain substantially higher than they have for several years and should always be a factor for anyone looking for an element of guaranteed income in retirement.”

Investments
This is good news for investors – coupled with the news yesterday about inflation coming down, pausing rates indicates greater conviction in the economy, and the end – or near end – of this rate hiking cycle.
Inflation is bad news for nearly all asset classes, it both erodes returns and makes it harder for investors to find cash to invest in the first place. Yes, higher rates have been good for both cash and gilts, but they’ve also been a sign of economic malaise, so investors should welcome this move from the Bank. UK equity income funds offer an interesting opportunity- an undervalued market with good dividend cover will help combat inflation while it (hopefully) dwindles.”

Sarah Coles, head of personal finance, Hargreaves Lansdown
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown: