Bank of England holds base rate at 5.25 per cent

The Bank of England has kept interest rates on hold at 5.25 per cent following 14 consecutive months of rate rises. The central bank has been fighting a constant battle to stem the soaring cost of living, with inflation rises blamed on the war in the Ukraine and supply and demand issues left over from the Covid-19 pandemic.

Steve Seal, chief executive at Bluestone Mortgages said consumers and borrowers across the country could finally let out a huge sigh of relief as interest rates remain unchanged.

He said: “For those worried about keeping up with their mortgage payments or looking to take their first or next steps onto the property ladder, rest assured that there is help at hand. No matter someone’s circumstances, mortgage brokers and specialist lenders can cater to their needs, making it possible for them to achieve their homeownership dreams, where previously they thought it not possible.”

Lag effect on interest rates

Giles Coghlan, Chief Market Analyst consulting for HYCM, said: "There were a lot of moving parts for the Bank of England (BoE) to contend with going into today’s decision. But, with yesterday’s core print still three times higher than the BoE’s target and wage growth remaining strong, the BoE clearly want to stamp inflation into the ground for good.

“However, there is a risk that the ‘lag effect’ on interest rate hikes means that today’s decision may not be felt for another 9 to 12 months. As such, with economic growth already faltering and core inflation remaining high, today’s hike runs the risk of overtightening the economy and inducing a period of stagflation further down the line.

“For investors, they have been expecting the BoE to signal a lower path for rates ahead so the GBP's reaction may be muted, especially after CPI miss yesterday which weakened the pound further going into today's meeting. However, the Pound could slide further should the markets foresee stagflation ahead and percieve a BoE policy mistake.”

Andy Mielczarek, founder and chief executive of SmartSave said: "Yesterday’s fall in inflation defied expectation and has released pressure on the Bank of England, allowing for its decision to hold interest rates. 

“However, for savers, the same issue remains: there is a stark difference between the base rate and the interest rates on offer through high street banks. We are seeing too many people being penalised for their loyalty to big banks as they achieve worse returns on their savings. 

“Searching the market for alternative products remains vitally important, and branching out from established high-street names remains one of the best ways for people to lock in a better deal. For those in a position to put away a lump sum, there are a number of fixed-rate products currently topping the base rate that savers can make the most of to grow their money.

"Crucially, these are covered by the same Financial Services Compensation Scheme (FSCS) protection in the same way as traditional banks, which will offer consumers security and peace of mind.” 

Annuity boom

Lily Megson, Policy Director at My Pension Expert, said: "Finally, a week of good news. There is a sense that we may, at last, have turned a corner with both inflation and interest rates both swinging in favour of Britons’ finances. However, this optimistic turn isn’t necessarily prompt celebration. Inflation remains high, people are still adapting to higher interest rates, and last week’s heated discussions surrounding the future of the triple lock will all contribute to a continuing uneasiness among consumers about their financial planning, particularly for retirement.   

“What can we expect in the pensions market? Even though there was no base rate hike today, some pension planners may still consider annuities as the right option for their retirement fund – understandably so, given that they recently reached their highest rates in 20 years.

"However, it’s crucial that pension planners are not swayed by the headlines and recognise that not everyone shares the same financial objectives in retirement. Despite attractive rates, annuities may not be the golden ticket for everyone."

Marcus Brookes, chief investment officer at Quilter Investors said the BoE chief Andrew Bailey and the rest of the Monetary Policy Committee will also be looking closely at the US, where the Federal Reserve hit the pause button on interest rates.

He said: "Sentiment across the pond remains hawkish though, with one more rate rise expected this year. Clearly that economy is in a much stronger position so can probably take another rate rise, but they are looking to reach the end of the hiking cycle and the Bank of England will not want to diverge too greatly from a key economic power. As such, we wouldn’t be surprised to see the BoE begin to mirror the Fed once again.

“However, while this may be the end of the interest rate hiking cycle, this doesn’t mean the pain will simply go away for businesses and consumers. The BoE has made it clear that rates will be higher for longer, so investors need to prepare accordingly. Quality companies, with stable and sustainable cashflows will ultimately benefit most from a period of rates being above 5 per cent, and as such now is a time to hold the nerve and not try to time any cut in rates, as these are a long way off for now.”

What does rate rise mean for pensions?

Dean Butler, anaging director for retail direct at Standard Life, part of Phoenix Group said people were already lengthening their mortgage terms and this was unlikely to change soon.

He said: “We’ve even seen the introduction of 40-year mortgages. Such a long borrowing term may make sense for some, however it’s worth considering the potential retirement implications."

"For those starting out, the average first-time buyer in the UK is 34, meaning that they would be 74, 6 years beyond their current expected State Pension Age if they took out a 40-year mortgage.

"This places greater emphasis than ever on the importance of saving into a personal or workplace pension, as many people will have to wrestle with housing costs beyond their working life and it’s highly unlikely the State Pension of the future will be enough to cover the repayments in addition to general living costs.

 “Whether or not Bank of England chooses to go higher again in future, we’re entering uncharted territory. For the first time, what looks like a long-term higher interest environment is meeting a world in which responsibility for pension saving is mostly with the individual as ‘Defined Contribution’ (DC) pensions continue to replace employer guaranteed defined benefit (DB) schemes.

"It’s pensions engagement Season – and anyone considering extending their mortgage term beyond retirement needs to pay their pension some attention.”