By Bank of England policymakers may not be equipped with an aide memoire of a fiscal statement to work out how much corrector pen it needs to try and erase inflation, but they have a pretty clear timetable laid out about the course the economy is set to take.
The price spiral is a tough, particularly with labour shortages fuelling wage growth and volatile energy prices to navigate.
However, they no longer have to deal with the threat of a mass tax cut fuelled burst of stimulus.
Instead, we have a new Chancellor flagging that spending will be reined in, just at the moment consumer confidence is plummeting and the housing market is going into shock.
Now that risks of a deeper recession have grown, the Bank of England is not forecast to mega size a rate hike this time round, but to opt for a still hefty 0.75 of a percentage point rise, taking the base rate to 3%.
Inflation may well now peak above 11% with scorching food prices in particular pushing up expectations.
So, the Bank is still set to signal a further tightening of monetary policy, with financial markets now expecting that interest rates will reach around 5% next year before declining, as the impact of the recession, lower commodity prices and an easing off of supply chain snarl ups feed through.
Like the ECB last week, the Bank wants to wave red flags now to throw cold water on expectations that there will be hotter prices to come and drown out demands for higher wages, which could lead to a more embedded price spiral.
Dampening down demand now by raising rates and making borrowing more expensive is set to cause further financial pain for companies and consumers, but central banks clearly think it is the price to pay to reduce the risk of a prolonged period of stagflation.’’
How it will hit our pockets
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments:
“The market is pricing in a rise of 0.75% to 3% this week.
The strange state of the market right now means this isn’t going to mean a big bump in savings rates or mortgage rates for most people, so we need to understand what’s going on in order to work out the best possible approach for our money.
What it means for mortgages
For anyone on a variable rate mortgage – like a standard variable rate or a tracker mortgage – much of this rate rise is likely to be passed swiftly through into your monthly payments.
If you have a £250,000 mortgage over 25 years, at the Moneyfacts average mortgage rate of 5.4%, and the full rate was passed on, it would mean a rise in monthly mortgage payments from £1,520 to £1,643 – so you would need to find another £123 a month.
For anyone whose fixed rate deal has come to an end who decided to revert to the SVR and wait to see what happens to fixed rates, it could end up causing the kind of headaches you may have been trying to avoid.
For those who are planning to fix their rate, you may face the strange phenomenon of interest rates rising, while mortgage rates remain stable – or even fall.
The mortgage market has been driven most recently by gilt yields, and as they have fallen back, mortgage rates have eased off very slightly.
Given that a 0.75% rate is widely expected and therefore priced into the market, it may not change the picture significantly.
The potential closing of the gap between the SVR and fixed rates could persuade some wait-and-see mortgage fixers to pull the trigger – while others may be tempted to hold on to see if a longer period of boring politics and more predictable economics produces slightly lower fixed rates.
What it means for savers
For savers, any rate rise is unlikely to provide an overnight big bang where rates jump significantly.
With the big high street banks stuffed full of lockdown savings, they’re happy to continue offering miserable rates – typically under half a percent.
It means it’s up to the smaller, newer and online banks to bump rates up.
They don’t want a vast amount of new cash, and they don’t want to pay more than they have to for it, so they’re likely to continue nudging rates up a fraction at a time.
The rate rise is likely to mean the upwards shuffle continues, rather than providing any particularly dramatic acceleration.
If you were waiting for a better rate in order to fix, you’re not going to get it overnight after the announcement.
It means that anyone playing the wait-and-see game needs a clear understanding of what kind of rate they’re prepared to fix at, how long they’re prepared to wait, and how much interest their cash is missing out on in an easy access account in the interim.”
How will annuity rates react?
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, comments:
“After months of rising yields annuity rates have cooled slightly in recent days.
The appointment of Rishi Sunak as prime minister has brought an element of calm following the bond market meltdown triggered by the Truss government’s mini-budget.
The announcement caused chaos for investors but proved a boon for annuities as surging gilt yields pushed incomes ever higher.
Data from HL’s annuity quote service shows a 65-year-old with £100,000 able to get an annuity income of £7,586 per year.
They’ve since come down slightly to £7,532 per year but this is still a whopping 45% increase on the £5,208 best-buy income from October 2021.
An interest rate hike this week could further stimulate the market and we could see annuity incomes on the rise again.
Annuities have declined in popularity since Freedom and Choice but should be considered if there is a need for some element of guaranteed income in retirement.
The revival in incomes could prompt people currently in income drawdown to take a closer look at what annuities can offer but it’s important to use a service that looks industry-wide to get the best quotes.
Annuity providers will usually guarantee their quotes for a certain period so even if annuity rates move down you may well still qualify for the higher income – it’s worth checking guarantee periods when you get a quote.”
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