Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group commented: “Interest rates impact many areas of our lives as the cost of borrowing money rises or falls – while rising interest rates like we’ve seen since 2022 are good news for savers, mortgage, loan and credit card payments rise and landlords are likely to pass on higher rates to renters. In 2023 rates reached their highest level for 15 years while credit card debt increased by 8.7% in the year to June*, and around 1.4 million households faced the reality of far higher housing costs when their fixed mortgage deals came to an end. With no sign of significant interest rate falls yet despite rising pressure on the Bank of England to change course, and well over a million more fixed mortgage deals expected to expire in 2024**, it’s no wonder that people feel anxious or uncertain when changes are announced. These days people tend to get bombarded with alerts and notifications from news apps and companies as soon as something is announced, which can increase anxiety and confusion.
“It’s easier said than done, but making sure you have a buffer for rising rates when making a big financial decision like taking out a mortgage or loan can help to ease anxiety later on. If you can, build up a ‘rainy day’ savings pot you can dip into if times get tough as well, and be sure to look for the best rates on offer – right now, even some cash-based savings accounts are offering inflation-beating rates.”
Danny Vassiliades, Partner at XPS Pensions Group, commented: “The Bank of England has again held firm today in maintaining the base rate at 5.25%. This is despite yesterday’s announcement that CPI inflation fell to 3.4% over the year to February 2024, its lowest level since September 2021.
However, this welcome fall in inflation has once again raised market expectations that the Bank’s rates cuts are imminent. At XPS, we estimate that a 0.25% decrease in interest rates, outside of current market expectations, could increase aggregate UK scheme liabilities by c.£40bn. We therefore recommend that schemes should ensure they have suitably balanced investment strategies to protect against any adverse, unexpected market movements. Any future rate reductions would also be welcome news for debt holders, including the many pension scheme members with mortgages.”
Chris Arcari, Head of Capital Markets, Hymans Robertson, said: “As expected the Bank of England left rates unchanged at a 23-year-high of 5.25% p.a. Headline CPI inflation has fallen sharply, to 3.4% year-on-year, from its 11.1% peak in October 2022. Indeed, it is expected to fall further and even dip below target in late spring and early summer, as the full impact of lower energy prices and lower food and goods price inflation is felt.
“However, there are reasons for the Bank of England to err on the side of caution with regards easing policy. Core inflation, which excludes volatile energy and food prices, is still more than double the bank’s target at 4.5% year-on-year. And service-sector price and wage growth, both running at 6.1% year-on-year, are two closely watched measures of genuine domestic price pressures. These data points more than justify the BoE’s current wait-and-see approach.
“Nonetheless, recent and forecast declines in inflation are likely to open the door to rate cuts this year. Even though the BoE stopped raising rates in August last year, monetary policy has continued to tighten, as real interest rates have risen as inflation has declined, and so a moderately restrictive monetary policy stance can be maintained, even as interest rates are lowered. Additionally, central banks do not target realised inflation, but where they think inflation will be over the forecast horizon, which may be a reason for a central bank reducing rates even if core or headline inflation is still above target.
“Given weak real GDP growth and declining inflation, we see scope for two to three 0.25% p. rate cuts this year. However, we expect central banks, including the BoE, to err on the side of caution and look to slowly make rates less restrictive, rather than cutting rates to levels that would be considered stimulative. Given still strong underlying inflation pressures, we see the balance of risks pointing toward the central bank reducing rates less, rather than more, than the market expects.”
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