With plenty of key economic data coming through on the UK economy next week, market watchers – including the team at Hargreaves Lansdown – are looking ahead to the data.
With UK Inflation is expected to rise from 3.8% in July to hit a peak of 4% in September, we may well see it increase in August. The overwhelming consensus is that UK interest rates will be held at 4% next week’s Bank of England meeting. But what might this mean for investors, savers, pensions, annuities and borrowers? Some of the HL team have shared their analysis on what this all means as follows:
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“Just like the weather, the temperature for inflation looks set to have been steamy in August. With food and grocery prices still on the boil there’s not likely to have been much cooling off. As people ringfence budgets for small treats, spending on entertainment, holidays and favourite foods is likely to have kept upwards pressure on the Consumer Prices Index.
Retail sales figures show there was a more upbeat pattern of spending later in the summer, particularly for non-essential items. The broader rise we’ve seen in services inflation, in particular, is an ongoing concern for Bank of England policymakers. Some will worry that the persistent increase in everyday prices will propel more higher wage demands and make inflation harder to cool.
Inflation is expected to peak at 4% this month, before starting a downwards drift. Even though we’re expecting bad news from the employment market, with every chance of more weakness everywhere from unemployment to vacancies, the Bank isn’t keen to cut at a time when inflation remains so stubborn. So, borrowers look set to need lots more patience, given another interest rate cut is not likely this month or even by the end of the year.
Another reduction is not fully priced in by financial markets until March. This is likely to keep gilt yields higher, and cause continued headaches for the government, given it means borrowing costs stay elevated, keeping the public finances in a more fragile state.”
What this means for savings
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“The savings market is tipping back towards normality. We’ve hit a peculiar juncture, where the most competitive deals across the board are all pretty similar.
We’ve come through a long period where high interest rates in the short term were expected to be followed by cuts, so the best deals were available on easy access savings. Now rates are lower, and fell again last month, and because the easy access market is particularly sensitive to cuts, the best deals in this part of the savings market have fallen.
Meanwhile, the divide in the Bank of England Monetary Policy Committee vote last time round has convinced the markets that we’re not going to get another rate cut for a while, and that when they eventually come, they may be smaller and more spaced out. It means fixed rate deals have held up better.
As a result, when you exclude easy access deals with bonuses for six months or less, those only allowing small balances and those with limited access, the average rate of the five best easy access deals matches the average of the five best one-year fixed deals. The various fixed rate markets have largely equalised too.
You may still be tempted to hang on in easy access, because of the flexibility it offers. However, don’t underestimate the value of certainty. Rates are still expected to be on their way down, and when easy access rates fall, those fixed deals will look more attractive. It means that anyone who has cash they don’t need for a while might want to consider fixing while they can still get around 4.5%.
What it means for mortgages
Fixed mortgage deals have been drifting gradually down for some time, with the average 2-year fixed rate falling from 5.2% four months ago to less than 5% (Moneyfacts). They’re not going anywhere fast, and last month’s cut didn’t noticeably speed things up. Lenders were keen not to go too far or too fast, in case people who had already agreed a rate abandoned it in favour of a cheaper one.
The fact that more cuts aren’t expected for a while yet means we could see mortgage rates stabilise, so if you have a remortgage round the corner, it could be a good time to seek out a deal. Remortgages have been horribly painful, ever since rates started rising in 2022. In fact, the new HL Savings and Resilience Barometer shows that those who have remortgaged pay £88 more a month than those who haven’t, and have almost three times as much of their borrowing on variable rates. The fact that the process could be less painful in the coming months could be a huge relief for anyone facing the prospect right now.”
What it means for pensions and annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“It’s an important time of year for retirees with a slew of data due out in the coming weeks that will define how much the state pension will increase by next year. The triple lock aims to increase the state pension by whichever is the highest of 2.5%, average wages and CPI inflation. The all-important wage figure is due out next week while the relevant inflation figure will be published in October.
Inflation currently stands at 3.8% but is expected to increase while average wages currently stand at 4.6% but have fallen back in recent months. Only time will tell which will be higher but if the highest figure proved to be 4% for instance, then that would see the value of the full new state pension boosted by close to £500 a year.
Pensioners on the basic state pension would also see their state pension rise by the same amount but there is a fly in the ointment. Those in receipt of top ups such as the state second pension will find those elements rise in line with inflation rather than the triple lock – this is fine if inflation proves to be highest figure but if it’s beaten by wages then overall their state pension increase will be slightly lower.
Next week’s interest rate decision will also be of interest to retirees looking at getting a guaranteed income through an annuity. Incomes are riding high with the latest data from the HL annuity comparison service showing that a 65-year-old with a £100,000 pension could get up to £7,793 per year from a single life level pension with a five-year guarantee. Interest rates are one factor impacting annuity rates and so the expected hold should mean incomes remain pretty solid and interest will continue to be high.”
