Interest rate expectations soar: What it means for savings, annuities and mortgages

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

The instinctive reflex of the market is in optimal condition. Yesterday’s horrible surge in the core inflation took advantage of it in the sweet spot and we’ve seen interest rate expectations spike to around 5.5%.

We can’t rule it out, but there’s a reasonable chance it’s an overreaction.

Fortunately, if you’re in the market for savings or a annuity, could push the market in the right direction. Meanwhile, for those looking for a mortgage, it’s more like a kick in the teeth.

UK inflation falls, but what next for interest rates and the economy?

Interest rate expectations

Emma Wall, Acting Director of Active Savings

Persistent inflation makes it very likely that we will get another rate hike at the next Monetary Policy Committee (MPC) meeting in June. Where the fees go from there, however, is less clear.

The US Federal Reserve (Fed) has indicated that it is pausing rate hikes, and Europe is not showing any signs of big hikes either. Given how intertwined our markets are, it is unlikely that we will see the Bank of England (BoE) swim against the tide.

Instead, we think they are likely to follow the Fed’s “pause, don’t pivot” mantra. So while we may not see rate cuts before 2024, it’s unlikely that there will be any big hikes in the pipeline after June.

What does this mean for savings?

The savings market does not quote based on what is going to happen, but on what the banks believe is going to happen. Expectations of much higher rates have passed through to the swap markets, which means that fixed rates are on the rise. We’ve seen a lot of price swings and some really attractive fixed rates, especially in the one-year market.

Given all the talk of more rate hikes in the coming months, you might be tempted to wait and see how high rates will go. However, you will take a risk. If the market is overreacting, we may not see rates go much higher in the coming months.

It is worth checking the rates on the market at the moment. You may find that they are attractive enough that it is not worth taking that risk.

active savings gives you online access to a range of fixed-term savings products at many banks and building societies.

You’ll have a choice of competitive rates (often much higher than big commercial banks) and opening new products is easy and only takes a few clicks.

You’ll see everything together in one place when you sign in, along with any other HL accounts you have with us, making it easy for you.

Explore Active Savings

What does this mean for annuities?

Helen Morrissey, Head of Retirement Analytics

A annuity allows you to redeem some or all of your pension for regular income that is guaranteed to be paid for life.

Annuities have been one of the main beneficiaries of the rising interest rate cycle so far, with income rising to the best levels seen in more than a decade in recent months.

It is not a foregone conclusion that income from annuities will rise due to any further expectations of rising interest rates, but it is a distinct possibility.

Annuities have an important role to play in helping people secure a guaranteed income level for retirement. However, for many years people have been put off by the low income on offer. With these earnings increasing so much over the past year, now might be a good time to consider whether an annuity is right for you.

Comparing prices can help you get the best deal. If you’re 55 or over, you can compare quotes from all UK annuity providers on the open market with our online tool. The options you choose can affect the annuity income you get. Consider your options carefully, as once your annuity is established, it cannot be changed.

Get an annuity quote

If you are not sure you are making the right decision for your circumstances, the government smart pension service offers free and unbiased guidance, and we can provide you with financial advice if you like

More information on financial advice

What does this mean for mortgages?

Sarah Coles, Director of Personal Finance

For those who wait and hope for fixed mortgage rates to come down, there could be a lot more waiting and a lot less hope.

The increase in exchange rates means that fixed-rate mortgages will increase in the short term. In the meantime, concerns about inflation stickiness are likely to mean we won’t get BoE cuts this side of the new year. That means mortgage rates are unlikely to plunge as fast as people expected. Meanwhile, anyone waiting for a variable rate will pay a higher price for longer.

If you’re looking for a fixed-rate mortgage right now, this is a terrible time, because the market is likely to heat up in the short term. There is hope that, over time, it will peak, but there are no guarantees.

It leaves you with the choice to fix at a higher rate than planned, go with a variable rate in the hope that fixes will reduce, or wait until the picture clears up. None of these are ideal, and neither are they bright indicators for the real estate market.

This article is not personal advice. If you are not sure, seek advice.

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorized and regulated by the Financial Conduct Authority under firm reference 115248.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorized and regulated by the Financial Conduct Authority (company reference number 915119). Hargreaves Lansdown Savings Limited is licensed by the Financial Conduct Authority under the Electronic Money Regulations 2011 Firm Reference 901007 for the issuance of electronic money.

Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).