Dean Butler, Managing Director for Customer at Standard Life said: “Today’s 0.25% rise in the Bank of England base interest rate, while impacting all borrowers, notably adds further pressure to the significant and growing minority of retirees who still have a mortgage to pay or rent privately. This time last year the rate had just been raised above 1%, now we have the highest Bank of England base rate since Autumn 2008. The speed and severity of the change continue to create financial shockwaves and retirees who were living quite comfortably early last year might now find themselves struggling, particularly as rate rises have been coupled with stubborn double-digit inflation.”
Home ownership and retirement living standards
“Most estimates of the savings you need to live comfortably in retirement, including the Pensions and Lifetime Savings Association (PLSA’s) Retirement Living Standards, assume no housing costs – however, this is not the case for all. Recent Phoenix Insights* research found 13% of retirees contacted were not homeowners, and so would find themselves paying a mortgage or on the receiving end of a rent increase as a result of higher rates. With the number of people unable to get on the property ladder as a result of high rents increasing, there’s the potential for this issue to worsen as current generations retire. It will be interesting to see if the recent announcement of the UK’s first 100% mortgage since the 2008 crash shakes up the market and helps address this.”
Short-term pressure versus long-term planning
“Retirees struggling to pay for their increased housing costs might naturally be tempted to dip further into their pension savings. While in many cases this will be a sensible decision, there’s always the risk of running out of pension savings later in life. We would urge people to first look at ways in which they can review their budgets and it’s also worth checking entitlement to state benefits - a good first port of call for this is to visit the benefits calculators page on the government website GOV.UK. Many benefits are hugely unclaimed, including Pensions Credit.”
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “Rising interest rates are making it harder for many people to save for the future, as debt payments take up more of their disposable income.
Anyone with a mortgage or other borrowings is likely to be finding it more difficult to add to savings or contribute to pensions, as higher rates combine with the rising cost of living.
Many people with cash savings accounts are still waiting to feel the upside of rising interest rates, as not all banks are passing increases on. Some savers, who may be struggling to set money aside anyway during a cost of living crisis, will feel short-changed.
At the point we start to see falls in inflation, the benefits of higher interest rates may be more apparent and any increase in borrowing costs may feel a little less painful.
On the plus side, we are beginning to see more stable macroeconomic conditions filtering through into improved performance of investments within typical default pension plans.”
But for now, the pain continues to be felt on all sides by households, in the form of high prices, high borrowing costs and frustrated savings efforts.”
Ross Barr, Senior Investment Strategist at Cardano, said: "Today, the Bank of England Monetary Policy Committee (MPC) raised bank rate by 0.25% to 4.50%. This is the twelfth consecutive rate increase delivered by the Bank over the past 18 months.
"We are now approaching the end of this hiking cycle in the UK. However, unlike many market participants, we don’t expect to see rates falling in the near future. Indeed, the market continues to anticipate further increases in the coming months, in stark comparison to other economies such as the US where the market is now pricing in cuts for the latter part of this year.
"The MPC remain acutely aware of the pressure from higher than previously expected inflation readings and a tight labour market. Nevertheless, the recent strengthening of sterling, and the base effects of 2022’s energy price rises, will help inflation rates fall significantly through the remainder of this year.
"Inflation is set to fall but at present we think that it will struggle to decisively stay below the Bank’s 2% target. We expect that monetary policy will have to remain in restrictive territory for some time before rate cuts could be considered. This is unlikely to be feasible until the second half of 2024.
"Although the short-term macro picture is uncertain, the UK gilt market now has some favourable characteristics. Like many other government bond markets globally, there is two-way risk. Yields will rise if the improving trend in inflation that we expect in the remainder of 2023 is not seen. However, they would very likely fall during any upcoming recession, especially as the market’s growth forecasts for 2024 are too optimistic in our view. Falling yields in a recessionary environment will prove to be a valuable diversifying offset to equity markets for Pension scheme investors that have bonds in their growth asset allocations, especially relative to other government bond markets."
William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says: “Inflation in the UK has taken longer to fall from its peak than in other economies such as the US and euro-zone, having only fallen by 1.0% since the peak in October 2022. Although some of this is due to one-off factors such as higher energy and food prices in the region, the fact that core inflation, which excludes these, remained flat at 6.2% in March made it easy for the Bank of England to justify another 0.25% interest rate hike.
“The latest forecasts from the BoE show another upgrade to growth for this year, bringing it more in line with the ONS’s forecast. This mostly reflects lower gas prices. However, their inflation forecast for this year has gone also risen. This is due to recent data showing wage growth remaining high at 6.6%, indicating that the labour market remains tight enough for the Bank of England to contemplate additional rate hikes in the coming months.
“The initial market reaction to the interest rate move was limited as it had already been priced in by investors. Although investors would have taken some comfort from the upgrade to the growth forecast this has been offset by the BoE’s view on inflation. Although the market reaction today has been muted, it is important for advisors to be cognisant that we still expect bond market volatility to be remain high in the coming months especially around inflation data releases.”
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