Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “People up and down the country will now be asking if 5.25% marks the peak in what’s been a sustained run of interest rate rises. Either way, it’s clear we’re all living, working and retiring in a very different climate to the one we’d come to know so well. While nobody thought the long period of low rates would last forever, the speed and scale of what’s happened since has come as a huge financial shock to households who are looking for ways to soften the blow, even if the rate is holding fast for now.
“Unsurprisingly, people have been looking to lengthen their mortgage terms to lower monthly costs* or get on to the housing ladder, and we’ve even seen the introduction of 40-year mortgages. Such a long borrowing term may make sense for some, however it’s worth considering the potential retirement implications. For those starting out, the average first-time buyer in the UK is 34**, meaning that they would be 74, 6 years beyond their current expected State Pension Age if they took out a 40-year mortgage. This places greater emphasis than ever on the importance of saving into a personal or workplace pension, as many people will have to wrestle with housing costs beyond their working life and it’s highly unlikely the State Pension of the future will be enough to cover the repayments in addition to general living costs.
“Whether or not Bank of England chooses to go higher again in future, we’re entering uncharted territory. For the first time, what looks like a long-term higher interest environment is meeting a world in which responsibility for pension saving is mostly with the individual as ‘Defined Contribution’ pensions continue to replace employer guaranteed ‘Defined Benefit’ schemes. It’s Pensions Engagement Season – and if you’re considering extending your mortgage term beyond retirement there’s never been a better time to pay your pension some attention.”
Felix Currell, Senior Consultant, XPS Investment said: “Following the surprise fall in inflation announced yesterday, the Bank of England today announced that base rates will not increase and instead remain at 5.25% for the time being. Prior to the inflation announcement, markets were expecting a further increase in the base rate but the recent data illustrates that inflation may be being brought back under control. The Bank of England’s decision offers hope to borrowers looking for a return to a low interest rate environment.
For pension schemes, longer-term gilt yields continue to remain volatile and are at similar levels to those experienced during the peak of the gilts crisis, whilst also being more than 1% higher than the lows of November 2022. However, these yield rises have occurred over a prolonged period enabling actions from pooled fund LDI managers and Trustees to take place in a much more controlled manner, supported by larger collateral buffers in line with new regulatory guidance.
There are still a number of pressure points within the UK gilt markets including increased supply (through significant extra borrowing expected by the UK government over the next few years and quantitative tightening) and a potential reduction in demand for new gilts as defined benefit schemes approach a point of having hedged most of their liabilities with existing gilt holdings. Vigilance is key for trustees to assess and implement their hedging needs in a volatile market.”
Sarah Pennells, consumer finance specialist at Royal London said: “After consecutive interest rate rises, this is a welcome pause for borrowers. Those on a tracker rate for their mortgage will doubtless be relieved that they will not see another rise in their repayment amounts. However, today’s decision by the Bank of England to leave the Base Rate at 5.25% won’t help people whose current fixed rate mortgage is near its end, as they’re likely moving off a rate that was cheaper than the new fixed rate deals available. For some, these higher repayment amounts will be unaffordable or a huge stretch on their finances.
“Although savings rates have been getting higher, with best buy easy access accounts paying over 5%, they have not kept pace with the rises in the Bank of England base rate. It's vital that savers shop around to see whether there is a better rate available for them.”
Shweta Singh, Chief Economist at Cardano: “Recent labour market and inflation data, which show labour market rebalancing and inflationary pressures easing, have just proven sufficient for the Bank of England to ‘wait and see’ how inflation trends continue to develop through the Autumn. However, it was still a very close call for MPC members which is reflected in the 5-4 vote outcome.
“Even if inflation is now tamed for this cycle (we don’t think that it is) wages continue to grow at a brisk rate and well above the level consistent with the Bank’s 2% inflation target. Underlying inflation pressures remain sticky and are likely to stay elevated over the next twelve months. We think that today’s MPC decision represents a pause within, rather than an end of, the tightening cycle. We still expect one more interest rate hike and further expect that UK monetary policy will have to remain in restrictive territory for some time before cuts could be considered.
“Governor Bailey is going to want to talk about today’s decision in terms of the optionality that it provides to the MPC. He will be acutely aware that the lagged effects of prior policy actions are still to be fully seen, yet also mindful that key elements of the disinflation seen over the Summer were largely baked in due to year-on-year comparisons in energy prices.
“The heightened interest rate environment also challenges the market’s UK growth forecasts for 2024. Expectations which are still too optimistic in our view. In the weaker growth environment that we expect, both in the UK and abroad, government bond allocations will prove to be a valuable diversifying offset to equity market investments for defined benefit pension scheme investors’ growth portfolios."
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