- Markets on Monday morning were pricing in a 17% chance of a rate hike by the Bank of England when they meet on Thursday (30 April), according to LSEG data
- The price of Brent crude has surged to around $108 a barrel
- Government warns higher prices could linger for eight months after the Middle East conflict is finally resolved
- Uncertain environment for mortgages and savings expected to continue
- What can people do to protect themselves?
Danni Hewson, AJ Bell head of financial analysis, comments on the challenge facing the Bank of England ahead of this week’s interest rate decision:
“In the days leading up to an interest rate decision it’s usually pretty easy to predict which way the vote will go. But the unpredictability of the conflict in the Middle East is making the tea leaves difficult to read.
“With the oil price jumping to $108 a barrel in early trading on Monday morning, markets are pricing in at least two rate increases in the coming months. Whilst the smart money is for no move from the MPC this week, LSEG data points to a 17% chance of a hike on Thursday.
“The last vote was unanimous – all MPC members felt it was prudent to wait and see exactly how the Iran war would impact prices here in the UK. March’s inflation data has started to answer that question, with the surge in the price at the pump hitting motorists hard and pushing up headline CPI to 3.3%. That now raises the prospect of a split vote.
“How many members feel it would be sensible to begin raising interest rates in a bid to prevent inflation becoming entwined in the UK’s economic fabric once again will affect market, business and consumer sentiment. People’s memory of the last cost of living crisis is still fresh, the scars haven’t healed, and households are already nervous about how rising prices will nibble away at any spare cash in their pocket.
“The government is warning that the effects of higher prices will linger for at least eight months once the conflict is resolved and the Strait of Hormuz is reopened. But the key question is still when that might be and how tough things might get in the meantime.
“So far, the public is being told to keep calm and carry on as normal, but behind the scenes there is a huge amount of work going on to try and mitigate both the potential of shortages and to keep prices from spiralling. No one wants to see a return to double digit inflation and questions about whether the Bank was too slow to act in 2021 will be at the front of MPC members’ minds on Thursday.
“The economic picture is very different today than it was then, as the country dusted itself off after a series of Covid lockdowns. Back then businesses were racing towards ‘normality’, vacancy numbers were surging, and people were raring to live their lives to the fullest.
“Whilst the last set of unemployment figures did show a fall in the jobless rate, and the economy did grow faster than expected in February, there is concern about the fragility of that resilience.
“The UK is particularly vulnerable to energy price shocks. It’s also facing a potential period of domestic upheaval if next month’s local elections deliver the government the political blow most commentators are expecting. Government borrowing costs are already uncomfortably high, which means the wiggle room for potential measures to help struggling families must be carefully costed.
“The MPC will have to consider a smorgasbord of possible risks when making its decision, with slowing wage growth expected to be one area that provides it cover to hold fire. Move too fast and the Bank could risk pushing the country deeper into a recession that it’s expected to flirt with in the second half of the year. Move too slow and we could all be facing another round of sticker shock at the supermarket till.”
Mortgages and savings markets on tenterhooks
Sarah Coles, AJ Bell head of personal finance, comments:
“The fact that rates are likely to be staying put this week doesn’t mean we’re set for a period of calm in the savings and mortgage markets. Everything from international turmoil to political drama and market competition means both markets could go anywhere from here.
“A big factor in pricing fixed rate savings and mortgages is government bond yields. These power the swap rates that banks use to buy fixed rates in the market. And they’ve had a torrid few weeks.
“In March, the outbreak of the Iran war raised inflation fears. The market expected the Bank of England to hike rates a number of times, to keep a lid on price rises. This made government bonds look less attractive, so prices fell and yields rose, pushing up fixed rate deals. The mortgage market tends to move faster than the savings market, so rates were quicker to respond, but fixed rate savings deals also nudged up.
“During the first half of April, inflation fears eased slightly, so the market started expecting fewer rate rises. It’s why we’ve seen mortgage rates fall a little and savings rates stabilise. However, the drama has continued more recently, because political speculation put investors off government gilts and yields rose again. It means we could see rates rise once more.
“The savings market is also being driven by competition. The fact this is the last year of a £20,000 Cash ISA allowance for under 65s means banks have upped their ISA game for the start of the tax year. This has had a knock-on effect on the savings market more generally, so there are an enormous number of accounts on offer right now, and rates are competitive. It’s a big part of the reason why we have seen easy access rates rise. If competition remains fierce, it could help hold rates up.
“However, an awful lot will hang on what the market thinks will happen next. If the Bank of England hints that it might raise rates to combat inflation, it would hike gilt yields, and push savings and mortgage rates up. Similarly, escalation in the war could stir more fears of inflation, which again would increase rate expectations. Meanwhile rising political debate – particularly around the local elections – could also mean gilt yields rise. On the flip side, if any of these things don’t materialise, yields could fall back and savings and mortgages fall with them.
“In such an uncertain environment, it’s impossible to guess what comes next. It means anyone planning to fix their savings might want to do so now, while rates are so strong, rather than holding out for more rises. Meanwhile, those with a remortgage due in the next six months might want to agree a deal for their remortgage now. If rates fall from here, they can shop around elsewhere closer to the time, whereas if they rise, they’ve protected themselves from bigger hikes in their monthly payments.”
