The Bank of England has kept interest rates on hold at 5.25 per cent — after 14 consecutive rate rises.
An additional rate increase was widely anticipated earlier this week, but yesterday’s lower-than-anticipated inflation data forced the Bank to hold off.
Most experts welcomed this move since it will help stabilise the financial markets because it indicates that the Bank of England thinks inflation is under control.
XPS Investment senior consultant Felix Currell notes that interest rates have a big impact on gilt markets. Despite rates remaining unchanged, he says that the gilt market is expected to continue volatile, posing difficulties for trustees.
Currell says “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 per cent 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.”
He says 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.
Currell adds: “Vigilance is key for trustees to assess and implement their hedging needs in a volatile market.”
Standard Life managing director for retail direct Dean Butler says: “People up and down the country will now be asking if 5.25 per cent 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.”
Franklin Templeton head of European Fixed Income David Zahn says: “The Bank of England (BOE) kept rates unchanged today by pausing interest rate increases. The BOE may possibly have to hike again if inflation doesn’t continue to decline, however, we may have seen the last interest rate hike from the BOE in this cycle.
“Economic data continues softening and inflation is declining and should continue into next year. Gilts look at attractive levels with the BOE on hold. We are currently positioned long duration in our UK Gilt fund and have added Gilts, currency hedged, into our European fixed income accounts in anticipation of a less hawkish BOE going forwards.”
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