Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The scene has been set for a rate cut next week, with December’s dip in inflation and the flatlining economy taking centre stage. Three policymakers wanted to see a rate cut at the last meeting to boost growth, and it’s looking highly likely that more will follow their lead next Thursday and vote for a reduction. Traders are currently pricing in the chances of an interest rate cut at 84%. The Fed's decision to hold rates, and its more cautious outlook, will also be playing on minds. So a rate cut encore may not materialise very quickly, given that inflationary pressures are waiting in the wings. Average prices charged by firms were rising at the fastest pace in January for 18 months, according to the flash purchasing managers index from S&P Global, which is monitored by the Bank.
Troupes of retailers have threatened to raise prices, due to the burden of higher National Insurance contributions from April. At the same time, companies in the private sector are cutting jobs at the fastest rate since the pandemic. The spectre of stagflation is looming over the economy, with inflation looking set to rise, while the economy stagnates, and this may constrain rapid monetary policy moves in the months to come. Financial markets are still pricing in an additional two interest rate cuts this year, but there is likely to be more caution around the table.”
Savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown: “With the base rate widely expected to be cut next week, a lot of the reductions have already been priced into savings products. Those providers that are paying above base rate on easy access savings will have to reduce their rates as a result of the cut, in order to ensure they don't operate loss-making products. As a result, the easy access market will come under a bit of pressure, with very little change expected in fixed terms. The cash ISA market remains incredibly competitive, with multiple providers still paying around or slightly above 5%. As we head towards the end of the tax year, it will be interesting to see if these providers can keep paying these rates, given they will likely already be operating them at a loss. The biggest driver will be if the market starts to price in more than three rate cuts over the medium to long term.”
Annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Annuities are riding high, and not even the prospect of an impending rate cut seems able to burst their bubble. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single life level annuity with a five-year guarantee. This is just under the all-time highs experienced in the aftermath of the mini-Budget and will be enough to continue to pique the interest of anyone looking to secure a guaranteed income in retirement. Doing your research is all important though – different providers offer different rates so if you accept the first one on offer you could miss out on a higher income. Use an annuity search engine to get a sense of what the market can offer before making your decision.”
Mortgages
Sarah Coles, head of personal finance, Hargreaves Lansdown: “A rate cut has been on the cards ever since inflation came in lower than expected for December, and the Bank of England lost its only good reason not to cut rates to support the flagging economy. It’ll be good news if we get the expected cut, but mortgage borrowers won’t be dancing in the streets. If you’re on a fixed rate, it’s not going to move the dial significantly overnight, because the market had already largely priced this in. Right now, Moneyfacts data shows the average 2-year fixed rate mortgage has inched up from 5.48% at the start of the year to 5.52%. It may inch down again in the coming days, but news that mortgage rates might be back where they were a month ago is unlikely to unlock the floodgates. What’s more positive is that if we don’t get any nasty surprises on inflation, rates are likely to be on their way down. It’s never a straight line, and it’s not worth holding your breath for deals back at 2% - but things are likely to be moving in the right direction. The latest HL Savings & Resilience Barometer shows that people with a mortgage have an average of £116,890 outstanding on their loan, so even the smallest shift can make a big difference to their financial resilience.”
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