In this article, our founder Stephen Dickinson gives his insight –
I wanted to chat about something on everyone’s radar these days—interest rates. The Bank of England’s been keeping them steady at 5.25%, and it’s got me curious about what’s in store.
I’ve gathered some quick insights on why rates went up, what’s keeping them there, and how it might shake things up for us—think mortgages, savings, and investments.
Interest rates and where we think they will go.
The Bank of England opted to maintain the base interest rate at 5.25% for the second consecutive month in November, sustaining historically high interest despite 14 previous consecutive increases. The decision was influenced by a notable decline in inflation over the past year, with the Consumer Price Index (CPI) falling from 11.1% in October 2022 to its current level of 4.6%.
For individuals with impending mortgage renewals or those on variable-rate mortgages, the hope lingers for a potential reduction in borrowing costs. To discern when interest rates might decrease, it’s crucial to understand the reasons behind their prior escalation;
The Bank of England’s mandate includes maintaining the annual CPI inflation rate of around 2%
The recent decision not to raise interest rates is partly attributed to the inflation rate dropping to 4.6% in the year to October. The Monetary Policy Committee (MPC) considers economic conditions when deciding to adjust the base rate, aiming to stimulate or restrain borrowing as needed.
Several factors contributed to the decision to keep rates steady: the ongoing downward trend in inflation, concerns about the weakened GDP growth, and the potential lag in the effects of previous rate hikes on the economy. Despite increased pay growth, softer employment growth was noted, limiting overall economic expansion.
The Bank’s sustained and aggressive rate hikes have yet to significantly lower inflation due to various supply issues, including post-COVID demand surges, geopolitical events, and Brexit-related import challenges.
Although inflation has decreased from its peak of 11.1%, concerns persist about the sustainability of high-interest rates, their impact on household finances, and the potential for negative economic consequences.
Anticipating a continued decline in inflation, many analysts believe that interest rates have peaked and expect the Bank of England to start cutting rates in mid-2024. Projections suggest a possible reduction to 3% by the end of 2025. This anticipated easing could alleviate financial pressure on households, especially those facing higher mortgage costs.
What about fixed rates?
How does all this market data affect the fixed rates that lenders offer?
Lenders predominately use SONIA interest rate swaps to price fixed rate mortgages.
They do it to manage the risk of offering a fixed rate in an ever changing financial landscape.
SONIA (Sterling Overnight Index Average) is a benchmark interest rate in the UK. A SONIA swap allows lenders to exchange fixed interest rate payments for variable (floating) rate payments based on the SONIA rate.
When pricing fixed-rate mortgages using SONIA swaps, lenders consider the current and future expectations of SONIA rates. If they expect SONIA rates to rise, they may charge a higher fixed interest rate on mortgages to compensate for the potential increase in their borrowing costs. Conversely, if they anticipate SONIA rates to fall or remain stable, they might offer lower fixed rates.
In recent weeks medium and longer term swap rates have dropped fairly significantly which has started a price war between lenders to position themselves at the front of the pack.
What about the housing market
The rise in mortgage rates has already led to increased monthly expenses for homeowners, potentially triggering some to sell their homes. Prospective first-time buyers also face challenges due to heightened mortgage costs, impacting property demand and contributing to a decline in house prices.
While there are concerns about a possible property crash, the stabilization of the base rate and faster-than-anticipated wage growth have tempered some analysts’ expectations.
Government interventions, such as support for mortgage customers and temporary interest-only payment plans, aim to assist those facing financial challenges.
What about savings and investments?
With interest rates being held for two consecutive months by the Bank of England, savings rates have also levelled off.
Another aspect is that higher rates mean you can earn more money by simply holding cash in your savings account. Which makes investing in stocks or other assets that carry risk less attractive.
Of course, this is the point and the Bank of England knows this, intentionally holding down the value of assets reduces the amount of money people have to spend on things…. which in turn reduces inflation.
I hope that gave you a bit of insight into interest rates.