Chris Arcari, Head of Capital Markets, Hymans Robertson says: UK interest-rate expectations have fallen from the levels touched in the wake of September’s ‘mini-budget’ and reflect a little more tightening by the Monetary Policy Committee (MPC). We expect the MPC to pause soon, but even though the UK faces the worst 2023 growth outlook among the major advanced economies, the committee is likely to be cautious about easing policy while the labour market remains tight.
“UK inflation likely peaked in October, at 11.1%, but is forecast to fall only gradually, averaging 7.3% year-on-year in 2023 and still remaining above 4% year-on-year at the end of 2023. April’s rise in the energy price guarantee, tight labour markets, and strong wage growth, are likely to contribute to stickiness in prices. However, base effects, falling commodity prices and weak economic activity should reduce price pressures. Given inflation is still expected to be above 4% y-o-y by end of 2023, the MPC are unlikely to cut rates this year, unless the recession proves much deeper than forecast.
“We expect service inflation and private sector wages, which grew 7.2% year-on-year on average in the 3-months to November, to remain in focus and, as a result, think the market is correctly pricing a 0.5% p.a. hike on Thursday. Whether the bank will follow up with another 0.5% p.a. hike in March remains to be seen, but we think the BoE are close to the end of their hiking cycle.”
Kieran Mistry, Senior Business Development Manager, Standard Life, part of Phoenix Group: “With the latest rate rise from the Bank of England largely anticipated, we expect this increase will already have been priced into schemes’ plans and shouldn’t significantly impact the much-improved funding position many have found themselves in.
“For Trustees of those fortunate schemes, the focus will be on capitalising on improved funding levels, setting this year up to be a record for the pension risk transfer market, with volumes predicted to top £40bn. Even before adjusting for interest rates, this could make volumes of buy-ins and buy-outs in 2023 the highest annual total to date. Many Trustees will be turning their attention to scheme preparation and reviewing asset strategies for buy-out readiness as priorities ahead of derisking activity.”
Clare Moffat, pension expert at Royal London, says: With inflation remaining stubbornly elevated, today’s additional base rate rise doesn’t come as a surprise, but it will be unwelcome news for borrowers of all ages. An increase in interest rates heaps further pain on variable rate mortgage holders, those coming off a fixed rate deal who will see a big jump in costs, and many renters will also see increases passed on.
“Traditionally an interest rate hike would be welcomed by retirees keen to earn more interest on their savings. However, increasingly pensioners in the UK have to take into account the cost of housing from their retirement income, something along with high inflation that diminishes the value of their pension income.
“The impact of rising interest rates on personal finances is an issue that’s keeping retirees awake at night, with a fifth of retirees (19%) admitting they’re worried about housing costs according to Royal London’s ‘cost of living’ research.”
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