The Bank of England has increased its benchmark interest rate by 0.5 per cent to 3.5 per cent.
Hymans Robertson head of capital markets Chris Arcari says: “Since the last Monetary Policy Committee Meeting in early November, pressure on the Bank of England to maintain market confidence has abated somewhat and, while further rate rises are priced, the extent of further rises expected has fallen dramatically compared to those seen in the wake of the now infamous “mini” budget.
“The market is pricing with near-certainty a 0.5 per cent p.a. rate increase on Thursday, a step down from the recent 0.75 per cent p.a. increase, with rates expected to peak around 4.7 per cent p.a. next summer. Despite recent growth outturns surprising to the upside, tentative signs of weakening labour demand and likely near-term economic weakness probably provides major central banks just enough justification to ease the pace of rate increases.
“However, wage growth remains strong, with average weekly earnings rising 6.1 per cent year-on-year in October, and the Bank of England are likely to err on the side of caution with stickier core inflation likely making the MPC less likely to start cutting rates towards the end of next year than the market expects, even if economic output is faltering. Put another way, rates may peak at a lower level than markets expect, but may stay there for longer.”
Royal London consumer finance specialist Sarah Pennells says: “The Bank of England’s decision to raise interest rates to 3.5 per cent will mean higher costs for millions of borrowers – whether that’s homeowners with variable rate mortgages or credit-card holders, whose provider decides to hike the interest rate.
“Earlier this week, the central bank warned that four million households, which includes those coming off fixed-rate deals as well as variable rate mortgage holders, face higher mortgage payments in 2023. Increased living costs and higher mortgage payments have already made it harder for people to afford debt repayments.
“A rise in mortgage rates of 0.5 per cent will cost someone with a £200,000 variable rate repayment mortgage an extra £53 a month, but this increase comes on top of the £260 hike in monthly payments they’ll have experienced since last December, when the base rate rose to 0.25 per cent.
“The only bit of good news is for savers, as interest rates on savings accounts have been rising over the last year. The best buy easy access accounts now pay as much as 2.9 per cent and NS&I will be increasing its prize fund rate on Premium Bonds in January. However, with inflation currently three times this level, people who keep their money in cash – especially over the long term – will find it loses value.”
Aviva Investors head of rates Edward Hutchings says: “The Bank of England duly delivered on financial markets expectations of a 0.50 per cent hike. With a 3-way split vote, it seems there is still much uncertainty amongst MPC members. However, the Minutes state that the BoE do expect a recession for a ‘prolonged period’! After its recent bullish run, Sterling strength could be somewhat more questionable from here and with further Quantitative Tightening to come plus a staggering amount of Gilt issuance, 2023 will continue to be volatile for the UK Gilt market”
AJ Bell head of personal finance Laura Suter says: “Andrew Bailey takes the role of the Grinch this Christmas, with the MPC delivering another rate hike to the nation just 10 days before Christmas. The increase, from 3 per cent to 3.5 per cent, is the ninth consecutive increase from the Bank of England, hitting a 14-year high for interest rates.
“This time last year the UK had interest rates of 0.1 per cent, the top easy-access savings account paid 0.7 per cent, you could get an average two-year fixed mortgage for less than 1.5 per cent and although inflation had crept up it still stood at just over 5 per cent, way below the level of price increases today. What a difference a year makes – base rate is at 3.5 per cent, the average two-year fix mortgage is now hovering around 6 per cent, the rate of inflation has doubled to 10.7 per cent and savings rates have soared.
“Savers will get a sprinkling of festive cheer as another rate rise will surely push the rate of interest paid on cash up further, making savings accounts more attractive. This time last year a one-year bond was paying 1.4 per cent and now it’s 4.5 per cent, according to Moneyfacts. There are some signs that the savings war is losing some of its heat, but savers are still in a far better position than 12 months ago.
“But for everyone else the outlook isn’t quite so rosy. Lots of people turn to debt at Christmas, and this year those debt levels are likely to be even higher thanks to rising prices. Another rate increase will raise debt interest rates again and cause a real crunch on borrowers at a tough time of year. Mortgage rates aren’t likely to leap on today’s news, as the increase was anticipated and already baked into many lender’s rates. But what does cause uncertainty is the direction the Bank takes from here. Markets are expecting a few more increases in Base Rate next year, with rates peaking around 4.75 per cent before the bank starts finally cutting at the end of 2023. But that forecast is reliant on so many factors – how sticky inflation proves to be, how large the unemployment figure becomes and what the next set of GDP figures bring are all key factors that will shape future interest rate decisions.”
Buck Principal and Actuary Ian Burns says: “Today’s rise brings the Bank of England base rate to 3.5 per cent, as the Bank continues to battle UK inflation. This is another reminder of just how much change the UK economy has undergone in the last year. In December 2021 the base rate was just 0.1 per cent and CPIH inflation was at 4.8 per cent. This volatility has been immensely challenging but has also opened up a number of opportunities for schemes.
“Trustees have worked hard this year to adapt their investment strategy and accommodate the new and changing market conditions. The rate of change has forced schemes to react quickly and has rewarded those with proactive trustees and well-thought-out contingency plans. Market shocks, like the LDI crisis triggered by the mini Budget, tested schemes’ operational governance and has forced schemes to reevaluate their positions. Funding levels have improved almost across the board and many schemes have used the last year to take advantage of tactical investing opportunities and strengthen their hand. As a result, many schemes will enter 2023 in a very different state from how they began the previous year.
“Despite this, there are some reasons for concern next year. Poor economic growth forecasts mean that 2023 could be a tricky year for some scheme sponsors. Similarly, rising inflation has caused a cost-of-living crisis for scheme members, eroding their purchasing power. This is a particular worry for those who are about to retire and current retirees, who don’t have the luxury of long time horizons to improve their positions.
“Many scheme trustees have shown throughout this year that they are alert to this danger and are ready to make use of appropriate contingency plans. As they continue to evaluate their investment strategy and plan for the new year it’s also vital that they communicate clearly with their members, to explain their plans and address any concerns.”
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