What An Interest Rate Rise From The BoE This Week Could Mean For You And Your Investments

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  • The Bank of England is likely to increase interest rates this week to 4.5%
  • If the rate rise goes ahead on 11 May it will be the 12th consecutive interest rate increase
  • Rising rates are generally good news for savers and bad news for mortgages, but it’s not so clear cut this time.

The Bank Of England To Raise Interest Rates

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

The curtain is set to rise on another interest rate hike from the Bank of England, with prices still scorching consumers amid worries the price spiral still risks becoming embedded in the economy. The stage is set for a 0.25% rise, particularly given that was the move chosen by both the Federal Reserve and the European Central Bank last week.

Although falling fuel and wholesale food prices will feed through to bring down headline CPI quite sharply from the summer, worries abound about core inflation, stripping out volatile food and energy prices, staying so sticky.

Despite the ratcheting up of rates from the ultra-low levels of 0.10% to 4.25%, it hasn’t triggered enough of a slowdown to put a lid on steaming prices. Although higher rates have set off a slowdown on net mortgage lending in March, house prices have bubbled up again.

Government support with energy bills and wages increases appear to be limiting the economic damage and with a recession being avoided for now, a swing upwards in confidence means consumers are more accepting of price increases and so spending is staying more buoyant that expected.

Policymakers are grappling with the painful truth is that a deeper downturn, and higher unemployment will be needed to bring down demand in the economy. This may already be on the way, due to the lag effect of rate rises. Company insolvencies shot up 16% in March, and another rate hike is set to push more precarious firms out of business.

So, while another hike looks pretty nailed on, decision makers will be peering very closely at the data coming through over the next few weeks, to judge whether rates ap 4.5% will be enough to squash out more demand, or whether we should brace for another hike in the summer.”

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“A rise to 0.25% is all but nailed on this month. It has been on the cards since March inflation came in at 10.1% – ahead of forecasts – and Bank of England data showing we’re borrowing and spending our savings is unlikely to have eased fears around inflation. Rising rates are generally considered a bonanza for savers and a nightmare for people with mortgages, but it’s not so clear cut this time.

Forecasting Bank of England rates is notoriously difficult: at the moment the banks are pricing in a rise to 4.75% this year, but plenty of economists believe it will peak at 4.5%. Regardless of who is right, it’s reasonable to expect the rate rise cycle is drawing to a close.

What It Means For Savings

When a rate rise like this has been so widely predicted, there’s a decent chance it is already largely priced in. Certainly, savings rates have been rising. The best fixed rates are back at the levels seen in November last year, and the one-year rate is even higher than it was at that point.

If you’ve been waiting for the right time to switch or fix, it can be difficult to take the plunge when rates are creeping up, and you might be tempted to hold off at a time of rate rises in the hope they go higher, but this could be a mistake.

When banks price their fixed rates, they look beyond the next couple of months to expectations for rates during the whole of the fixed period. At the moment, we’re thought to be approaching the end of the rate rise cycle. We’re then expecting rate cuts to come in 2024 and for them to settle lower.  It means we could see savings rates rise a little higher from here in the wake of Bank of England hikes, but they may not go much higher, and then they’re likely to drop.

For potential fixers, it’s worth considering whether you’re happy to fix at the moment, with the most competitive fixed rates around the 5% mark. Certainly, if beating inflation is your primary consideration, the fact that it’s expected to be below 4% by the end of the year, makes these fixed rates look attractive.

There’s also the question of the best possible period to fix your savings for. Typically, you’re rewarded more for fixing for longer, but at the moment competitive five-year rates are very similar to one-year rates. It can feel unsettling to lock your money away for longer, and if there’s any chance you will need it during this time, it’s not the right home for your money.

However, if you definitely don’t need this money for five years, a five-year fix could make sense. If the forecasts are right and we do get rate cuts next year, then when one- or two-year accounts mature, fixed rates could be lower. In the end, of course, you should be driven primarily by your own circumstances, and fix for the periods that make the most sense for you.

What It Means For Mortgages

Mortgage rates have been on their way down since the spectacular rises in the wake of the mini-Budget towards the end of 2022. Surprisingly sticky inflation has made this descent bumpier over the past couple of months – with the surprise hike in March pushing rates up very slightly, before they dropped back again.

There’s every sign a rate rise in May would have the same impact, and in the past week Moneyfacts figures show average 2-year mortgages have risen very slightly from 5.26% to 5.27%, while average 5-year rates are up fractionally from 4.97% to 4.98%.

It’s hardly a seismic shift, however, and now that the market has largely priced in this month’s rise, we can expect it to drift very slightly higher, and then fall back again, without altering the overall direction of travel.

This is because mortgage lenders are less focused on the rates today, and more concerned with what’s going to happen during the rest of the fixed period. They need to swap a variable rate for a fixed one in the swaps market, and increasingly the market is pricing in rate cuts further down the line, so market participants are prepared to swap a lower fixed rate in return for today’s variable one.

Overall, we’re expecting more mortgage rate falls through the rest of 2023, but movement may well be reasonably sluggish and slightly bumpy. For more significant rate moves, we’d need to see expectations of future rate cuts intensify, which may not happen until we get into 2024.

Your decision when to fix, and if so, for how long, will depend on your priorities. If you fix now, you’re likely to see rates fall in the coming months, but you can’t be certain when they’ll fall, or how far. Meanwhile, you may well be on a higher variable rate while you wait, so you’ll pay a price.

You might want to fix for two years on the basis that you’ll pay more for it now, but rates could be lower when you come to re-mortgage. Alternatively, you may decide that rates have fallen far enough for it to be worth fixing for longer, so you know where you stand.”

Article by Susannah Streeter, head of money and markets, Hargreaves Lansdown