Interest rates up at 0.75% – more is likely to follow
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The Bank of England’s monetary policy committee has lifted interest rates to 0.75% from previously 0.5%, while inflation is running at 5.5% and expected to reach 8% in Q2.
The Bank noted that the invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices, including food prices.
“It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly. Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow,” it said.
The Bank expects inflation to go as high as 8% in the second quarter of this year, “and perhaps even higher later this year”. While many defined benefit schemes have caps in place for inflation increases and revaluation of benefits, these still tend to be set higher than the levels of yield that gilts currently provide.
Rate rise won’t be the last
This rate increase was already expected by investors. “The increase today was widely anticipated,” said Toby Sturgeon, global head of fiduciary investment services at Zedra. Two-year gilt yields rose in the run-up to the announcement, followed by large falls after the news broke, he noted. “Cable also fell on the news as expectations that there would be 170bps of further rate hikes this year dropped to an additional 120bps of rate hikes instead, following the announcement.”
The Bank is expected to tighten rates further in coming months, said Susannah Streeter, senior investment and markets analyst at platform Hargreaves Lansdown, but added that “there is still plenty of uncertainty around the table about the path of those rate rises”; In the HL monthly survey, confidence that interest rates are going to be higher fell for the short, mid, and long term, as 88% of clients said they were confident that rates would be higher over the next six months, compared to 90% last month.
Steven Cameron, pensions director at provider Aegon, agreed that more is to come, noting that a “perfect storm” of inflation and supply chain disruptions means everyone’s eyes will be on the Spring Statement net week.
Will annuities gain some appeal?
Becky O’Connor, head of pensions and savings at platform interactive investor, pointed out that for those in drawdown, higher interest rates could negatively impact pension fund values depending on how it is invested, while inflation will be adding to pressure to withdraw more whilst reducing the buying power of the pension pot.
Pensioners might therefore consider looking at annuity rates to see if higher interest rates have made these a more appealing option than income drawdown. “This is becoming more of a possibility, after years of annuities looking distinctly unappealing,” she noted, but warned that annuities may not be adjusted for inflation.
