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Home Finance 0.5pp rise on the cards – what’s the deal for your finances?

0.5pp rise on the cards – what’s the deal for your finances?

by uma

0.5pp rise on the cards – what’s the deal for your finances?

  • The market is expecting interest rates to rise 0.5 percentage points next week
  • Pressure on the Bank to raise rates
  • Should you fix your mortgage rate now?
  • Fixed savings have peaked – variable rates creep up
  • Annuity rates still around 40% higher

Pressure on the Bank to raise rates

Susannah Streeter, senior investment and markets analyst 

“Bank of England policymakers will attempt to become Masterchefs on Thursday: trying to stop inflation burning spending power whilst avoiding the economy sinking like an undercooked souffle. A 0.5% hike is expected taking the official bank rate to 4%, with another rate rise to come.

Governor Andrew Bailey seems more confident that the Bank’s recipe is working, with inflation finally edging down from painful peaks and is hopeful a recession will be shallower.

But that won’t stop policymakers from making fresh moves to lower demand, because they worry that inflation is still running far too hot. Prices across services remain steamy, still climbing in December, even though the headline rate dropped back to 10.5% from the 11.1% October peak. Grocery prices continued their upwards march in December, with food and non-alcoholic drinks up 16.8% in a year. There are warnings from industry bosses that prices will take considerable time to come down. 

The tight labour market is still a big nugget of worry, and wage growth is particularly strong in the private sector, increasing by 7.2% in the three months to November compared to a year earlier.  The disparity with public sector pay, which rose just 3.3% in the same period, is stark, which won’t help waves of industrial unrest. But it also may mean companies will pass on those higher wage costs in further price rises, which could add to the inflationary spiral.

There is still a long way to go in cooling inflation, and interest rates still look set to rise to around 4.5% before the Bank presses pause on hikes. This will pile more pressure on borrowers, will further weaken a rapidly slowing housing market, and risks reversing the small rise in consumer confidence. It means that a recession may only have been delayed, and not avoided.”

Should you fix your mortgage rate now?

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:

“To fix or not to fix? It’s the conundrum that has faced remortgagers ever since the market was upended in September. There are no easy answers, but this rise will tip the balance for some.

Fixed rate mortgages are still horribly expensive. Moneyfacts puts the average two-year fix at 5.79% and the average five-year fix at 5.63%. However, a 0.5 percentage point rise is already largely priced in, and because inflation expectations have dropped significantly, fixed mortgage rates are expected to continue their gradual retreat from the peak. It means anyone coming to the end of a fixed rate deal needs to decide whether to fix now or wait and see if they can get a better deal.

Unfortunately, there’s no way of telling how much fixed rates will fall, or how long they will take to do so. Meanwhile, the cost of waiting will rise with the rate hike – because whether you fall onto an SVR or switch to a tracker rate, you’ll face an immediate squeeze. The market is broadly expecting another rise sometime in early 2023, so the squeeze won’t ease in the short term either. For some people this will convince them to pay more for a fix today, and take the uncertainty out of the equation.

For others, the extra cost today is worth the potential saving from a cheaper fix further down the line. They might hang on with a pricey SVR or move onto a tracker. Some will use a tracker for the short term, until fixed rate deals are low enough. If you’re considering this, you need to be confident that the fees you pay for an extra remortgage will save you enough in the long run to make it worthwhile – and because you have no idea how far fixed rates will fall, this will always be a gamble. Others will stick with the tracker for the full two or five years, and see where fixed rates are at the end of it. This provides the opportunity to benefit if rates do fall further down the line, but means being prepared to live with uncertainty and the potential that your costs will rise. In the final analysis, it comes down to how much you value certainty, and if you choose to take a risk – which one you’re most comfortable with.”

Fixed savings have peaked – variable rates creep up

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:

“The rate rise will be a boon for easy access savers, who’ll see rates continue to edge up. They’ve done so for the best part of a year now, and although they’re moving in tiny increments, if you haven’t switched for a while, you could make substantially more by tracking down a competitive deal. We won’t see any major shifts as a result of the rate change, because banks are keen not to attract too much cash, but it’ll still be worth keeping your eye out for deals. Right now, you can make 3% if you’re prepared to live with account restrictions, and fractionally less if you’re not. It’s not wildly optimistic to expect the most competitive easy access accounts to creep over 3%.

It looks distinctly like fixed rate savings have peaked, and a rate rise isn’t going to change this. It’s already priced in, and the banks are more concerned about what’s going to happen to rates further ahead. The market now expects rates to peak at 4.5%, and then fall back as the country wrestles with recession. It means they’re factoring in lower rates in future, so they’re repricing deals and we’ve lost some of the best. Back in November you could get one-year fixed rates offering 4.65%. Now the best is offering fractionally over 4.3%. If you’ve been waiting for the right time to fix your savings, you can’t afford to wait too long.”

Annuity rates still around 40% higher

Helen Morrissey, senior pensions and retirement analyst, Hargreaves Lansdown:

“Annuity rates have fallen back since the dizzy heights reached in the aftermath of the mini-budget but still remain almost 40% higher than the same point last year. At the time of writing, data from our annuity comparison tool shows a 65-year-old with a £100,000 pension could get an income of up to £6,892 per year. This compares to £5,003 at the same point last year.

Annuity incomes are determined by the yields on long-term gilts and interest rates have an effect – we cannot guarantee an interest rate increase will further boost incomes in the coming weeks, but it is a real possibility.

People interested in securing a level of guaranteed income for retirement through an annuity could benefit from going online to see what kind of rates are on offer. Different providers offer different rates, and you could get more if you are older or have a health condition so it’s vital to get a comparison from across the market to make sure you get the best deal.”

 

 

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