When will interest rates fall?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

BoE does not appear to be signalling an imminent rate cut

Ed Monk, associate director at Fidelity International said, "Another MPC member willing to join the doves and call for a cut is a gentle signal that things are still heading in the right direction - albeit more slowly than markets and households might want."

"The last leg of problem inflation looks like it will be the hardest to shift and the majority view at the Bank is clearly still that inflationary pressures need to fall back further," said Ed.

However, Ed said that the Bank does not appear to be signalling an imminent rate cut, with June now looking optimistically early. 

"There will have to be a shift in language as the summer progresses if the first rate cut is to come through before the Autumn," said Ed.

“Markets more widely have had to get used to rates falling less quickly than they expected at the start of the year. That may be a frustration for some but it’s worth remembering that inflationary pressures can be positives in an economy if they are accompanied by better growth and real-terms wage rises. Slower cuts to interest rates could be a signal of a more robust economy and lead to more sustainable and broad-based returns from investment assets.”

Current mortgage and savings rates

^{As of  9 May 2024} 
Dates and data to watch:   

• Gross domestic product first quarterly estimate - 10 May 2024
• UK labour market May - 14 May 2024

How rising and falling rates affect and mortgages and mortgage pricing?

Standard variable rate (SVR) mortgages and existing trackers tend to follow the Bank Rate, but the pricing of new deals is more complicated.

Banks and building societies lend money from deposits taken from customers but also from money they borrow on money markets.

Fixed mortgage deals are influenced by “swap rates”, be it two-year, three-year or five-year pricing, while variable rate deals, such as trackers are more closely aligned to changes in the yields on gilts, UK government debt bonds.

Since swap rates are based on what the markets think interest rates will be, if they rise, then mortgage lenders will increase their pricing to maintain their profit margin. If they rise too rapidly - mortgage lenders may have to pause lending or withdraw products until pricing stabilises.

When rate market pricing shifts, it steadily filters through to changes in mortgage pricing. A fall in swap rates is often followed by a fall in the rates being offered on new fixed mortgage deals, although this is never guaranteed given the many factors at play.

UK mortgage borrowers’ sensitivity to rates

The UK central bank is particularly mindful of the impact rate changes have on UK consumers.

Some markets, such as the US and Denmark, traditionally have mortgage rate terms of 20 to 30 years. In Britain, Canada and much of Southern Europe, short-term deals pervade.

It means that in the UK, most homeowners are currently on a fixed-rate mortgage, making it the most common type of mortgage.

The Bank of England is acutely aware that millions of people will see these arrangements, some fixed at rates below 1%, coming to an end in the coming years, with those borrowers compelled to take far higher rates.

As of 9 May 2024, the average two-year mortgage has risen to 4.82%, versus 4.65% on 29 April. The average five-year mortgage has also seen an increase from 4.3% to 4.45% (in the same period).¹

A peak in savings rates?

Savings rates, of course, are also part of this maelstrom of market pricing. The change in forward market pricing may put pressure on banks to withdraw some of the best buys on offer. Although again, these markets are volatile, and nothing is certain. Given inflation has fallen, saving rates now exceed inflation which currently stands at 3.9%.

As of 9 May 2024, the best return savers can currently get on easy-access cash accounts is 5.02%² although higher rates are available if you tie money up for periods.

The best fixed-term savings account offers 5.18% if you lock in for a one-year fix.

And finally… annuity rates

Aside from increased savings rates, another silver lining of the recent surge in Bank Rate has been improved annuity rates. With annuities, you hand over a lump sum and received an income, often inflation-linked, for the rest of your life. These rates were appallingly low in the era of low rates but have enjoyed a renaissance. Annuity pricing is influenced by the yields on gilts. The 10-year gilt yield hit a high above 4.5% in early September and has since fallen to around 4.17% (9 May 2024). If you sign up to our Pulse alerts, you'll be the first to know when forecasts move.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

Sources:

¹  The Times, 4 May 2024
² Money Saving Expert, 4 May 2024