- The MPC announced a rate rise of 0.5 percentage points.
- Mortgages: what it means for you
- Savers: what it means for you
- What next?
It’s yet another agonising squeeze for hard-pressed borrowers. The Bank of England has ratcheted up the pressure with another 0.5 percentage point hike. It’s going to come as a horrible blow for borrowers who got used to rock bottom rates, and haven’t seen anything like this for 14 years.
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To make matters worse, higher mortgage payments will come on top of all the other soaring costs – from food to fuel – and we have even more hikes looming on the horizon, with energy bills rising again in April. It raises the question of how much more squeezing we can take before we’re finally crushed.
For savers, while we may well see easy access rates creep up as a result, for anyone with a branch-based easy access account from a high street giant, the rewards will be pitiful. Despite a year of rising rates, they’re still paying a fraction of 1%. And for those planning to fix their savings for a year or more, a strange phenomenon in the market could actually see those rates fall.
Mortgages: What It Means For You
Homeowners on tracker mortgages or a standard variable rate will be clobbered by the rise immediately. Over the past few years, borrowers have overwhelmingly opted for fixed rates instead, but since September, those who came to the end of their fixed deal may well have reverted to the SVR while they waited for the dust to settle on the chaos in the mortgage market.
At the end of November, the L&C mortgage tracker put the average SVR at 6.3%, so if the full rise is passed on, rates will be edging close to 7%. It’s a horrible blow for anyone who reverted from a deal at 2% or 3%. And given that the average two-and five-year fixed rates have dropped below 6% - and the most competitive deals below 5% - it may be enough to persuade them to fix.
This might not be as low as rates go over the next few months. The topsy turvy mortgage market is likely to mean that even with this 0.5pp rise, mortgage rates are likely to continue to come down. This rate rise is priced in, and the market is still adjusting to new expectations that rates might not need to go as high as had been feared to get inflation under control.
However, there are no guarantees, because there’s always the potential for inflation to surprise on the upside, and for market movements to push rates up. It means wait-and-see borrowers can’t be sure how long they’ll wait, or whether it will be worth it in the long run.
Savings: What It Means For You
On paper, a rate rise is good for savers. We’re likely to see easy access rates continue to inch up. At the moment, you can make up to 3% on your savings if you’re prepared to accept restrictions, and we can expect accounts to start offering the same rate with more flexibility as we get towards the end of the year.
The high street banks increased rates on their branch-based easy access accounts very fractionally at the start of the month, and they may do again. However, they’re still likely to be offering a fraction of 1%, so if you’re tied to them by loyalty or inertia, this will cost you dear.
For fixed rate deals, there’s not such good news, because this rate rise was already largely priced in, so there won’t be a big bump on the back of the announcement. In fact, we’re expecting to continue to see the most competitive rates gradually withdrawn, and the best rates fall.
The market is repricing to take account of the fact that rates are expected to be lower later in the fixed term. However, you can still get one-year fixed rates at over 4.3% and two-year deals at 4.7%. And if the Bank of England’s earlier forecast for inflation at around 5% in 2023 and under 2% in 2024 holds true, you can beat inflation.
What Next?
However, there was some good news, because inflation is likely to have peaked, and the bank now expects it to drop back at the start of 2023, as the energy price hike a year earlier drops out of the figures. The new Energy Price Guarantee of £3,000 in April means bills will be lower than it expected last time it crunched the numbers.
It’s worth emphasising that lower inflation isn’t the same as price drops – it just means that things will just get more expensive more slowly. However, it feels like at least one of the pressures on us is set to lessen slightly, and there’s the hope that lower inflation means the Bank doesn’t feel compelled to raise rates so much or so quickly.
There was also better news on growth, because while the Bank is still convinced that we’re already in a recession, GDP is only likely to fall 0.1% this winter, which is better than it expected last month. We don’t yet know how long or how deep the coming recession is set to be, but in the interim we can take the better news where we get it.”
Article By Sarah Coles, senior personal finance analyst., Hargreaves Lansdown
