The Bank of England has kept interest rates on hold at 5.25 per cent — after 14 consecutive rate rises.
An additional rate increase was widely anticipated earlier this week, but yesterday’s lower-than-anticipated inflation data forced the Bank to hold off.
Most experts welcomed this move since it will help stabilise the financial markets because it indicates that the Bank of England thinks inflation is under control.
XPS Investment senior consultant Felix Currell notes that interest rates have a big impact on gilt markets. Despite rates remaining unchanged, he says that the gilt market is expected to continue volatile, posing difficulties for trustees.
Currell says “For pension schemes, longer-term gilt yields continue to remain volatile and are at similar levels to those experienced during the peak of the gilts crisis, whilst also being more than 1 per cent higher than the lows of November 2022.
“However, these yield rises have occurred over a prolonged period enabling actions from pooled fund LDI managers and trustees to take place in a much more controlled manner, supported by larger collateral buffers in line with new regulatory guidance.”
He says there are still a number of pressure points within the UK gilt markets including increased supply — through significant extra borrowing expected by the UK government over the next few years and quantitative tightening — and a potential reduction in demand for new gilts as defined benefit schemes approach a point of having hedged most of their liabilities with existing gilt holdings.
Currell adds: “Vigilance is key for trustees to assess and implement their hedging needs in a volatile market.”
Standard Life managing director for retail direct Dean Butler says: “People up and down the country will now be asking if 5.25 per cent marks the peak in what’s been a sustained run of interest rate rises. Either way, it’s clear we’re all living, working and retiring in a very different climate to the one we’d come to know so well.
“While nobody thought the long period of low rates would last forever, the speed and scale of what’s happened since has come as a huge financial shock to households who are looking for ways to soften the blow, even if the rate is holding fast for now
“Unsurprisingly, people have been looking to lengthen their mortgage terms to lower monthly costs or get on to the housing ladder, and we’ve even seen the introduction of 40-year mortgages. Such a long borrowing term may make sense for some, however, it’s worth considering the potential retirement implications.
“For those starting out, the average first-time buyer in the UK is 34, meaning that they would be 74, 6 years beyond their current expected State Pension Age if they took out a 40-year mortgage. This places greater emphasis than ever on the importance of saving into a personal or workplace pension, as many people will have to wrestle with housing costs beyond their working life and it’s highly unlikely the State Pension of the future will be enough to cover the repayments in addition to general living costs.
“Whether or not the Bank of England chooses to go higher again in future, we’re entering uncharted territory. For the first time, what looks like a long-term higher interest environment is meeting a world in which responsibility for pension saving is mostly with the individual as ‘Defined Contribution’ pensions continue to replace employer-guaranteed ‘Defined Benefit’ schemes. It’s Pensions Engagement Season – and if you’re considering extending your mortgage term beyond retirement there’s never been a better time to pay your pension some attention.”
Franklin Templeton head of European Fixed Income David Zahn says: “The Bank of England kept rates unchanged today by pausing interest rate increases. The BOE may possibly have to hike again if inflation doesn’t continue to decline, however, we may have seen the last interest rate hike from the BoE in this cycle.
“Economic data continues softening and inflation is declining and should continue into next year. Gilts look at attractive levels with the BOE on hold. We are currently positioned long duration in our UK Gilt fund and have added Gilts, currency hedged, into our European fixed income accounts in anticipation of a less hawkish BOE going forward.”
AJ Bell head of financial analysis Danni Hewson says: “It was about as close as it gets but today’s decision by the Bank of England’s Monetary Policy Committee brings to an end almost two years of consecutive hikes and will be welcomed by homeowners and businesses alike.
“Increasing the cost of borrowing was intended to cause pain, and to make people think twice about spending their hard-earned cash in a bid to tame raging inflation.
“The tight vote highlights the fact that the job is far from done. Inflation is still more than three times the bank’s target and a recent surge in the price of oil is cause for concern.
“But cracks are beginning to show in the UK economy. Job vacancy numbers are falling, growth has stalled, and the lag between implementing monetary policy and the impact being felt by the wider economy created enough uncertainty that five members decided a degree of caution was prudent.”
He adds: “For millions of homeowners who’ve already seen their mortgage payments increase or the half a million facing a hike in the run-up to Christmas, today’s decision will be cold comfort.
“Costs have skyrocketed as ultra-low rates were left in the rear-view mirror and though the competition is gradually returning to the mortgage market and the number of products available has increased*, those coming off fixed rates are facing a big cost of mortgage shock.
“A £100,000 loan taken out in September 2021 would have cost £443 in monthly repayments. The exact same borrowing today on an average two-year fix comes in at £688 a month.
“Even factoring in some capital repayment and assuming they could secure the best two-year fix (5.61 per cent), repayments would still be £584 on the £94,012 loan and there are sizeable product fees for that mortgage.
“For mortgage holders who chose not to fix but instead have endured the punishing standard variable rate which topped a record-breaking 8.09 per cent at the start of September, there is hope that locking into a new fix could start to look more attractive following today’s decision.
“Markets think the peak has been reached with over 70 per cent anticipating another hold at the next meeting in November. But anyone hoping that the base rate will make a swift return from whence it came is going to be sorely disappointed, as rates are expected to remain high for some time to come.”
He continues: “There has been better news for savers as under pressure banks have begun offering competitive options: Best easy access account: 5.10 per cent, Best one year fixed rate bond: 6.2 per cent (NS&I), Best notice accounts: 5.35 per cent (90 days’ notice), by comparison, at the start of December 2021 the top easy access account was 0.75 per cent and came with some catches regarding withdrawals.
“But savers need to be aware of a potential pitfall to this change in fortunes. Figures obtained by AJ Bell from HMRC show that an estimated 2.7 million individuals will pay tax on cash interest in the 2023-24 tax year.
“Increased savings rates coupled with a frozen personal savings allowance mean savers need to be savvy with their cash and consider tax wrappers like ISAs if they don’t want to experience an unpleasant side effect.”
