The time to stop raising interest rates is now, say business lobby groups who fear the negative impact of another rise in the cost of borrowing on their members after the latest jobs figures showed pay rises including bonuses, rocketing to 8.5% a year.
Salaries have soared this year in response to rising inflation and remained stubbornly high, despite 14 consecutive interest rate rises by the Bank of England. When the Bank’s monetary policy committee meets next week the pressure will be intense on its nine members to act again or risk further pay increases sending inflation higher next year.
UK pay rises at record rate despite growth in unemployment
Some Bank officials, those who, like the governor, Andrew Bailey, have signalled the end of the hiking cycle, will have hoped pay ticked down to show the medicine so far is working and the patient can escape without further treatment. However, the measure of pay that excludes bonuses stuck at 7.8% in the three months from May to July, the same as the three months to June.
A respite from further interest rate rises is certainly what the Institute of Directors wants.
Kitty Ussher, its chief economist, said that "although wage inflation still feels high there are special factor that have stopped it falling in line with recent declines in inflation. The spike in public sector deals that have sent pay, including bonuses across Whitehall, the NHS and the rest of the public services to a record high of 12.2%. More emphasis should be put on regular pay in the public sector, which is much lower at 6.6%, and below the July inflation rate of 6.8%. Private sector pay wage pressure, although also high, has grown at a lower rate in recent months and is likely to fall further as the labour market loosens and the headline rate of inflation comes down.”
The IoD’s surveys show the Bank’s large, half-a-point interest rate rise in June led to a worsening in the way that business leaders considered the outlook for the economy.
Yael Selfin, the chief economist at KPMG, said "he labour market more broadly was showing clear signs of weakening as the economy slows in response to interest rate rises. Like most economists, she said the pay figures meant a quarter-point increase next week was inevitable, but argued there would be little to support further rises. The labour market is starting to feel the weight of slowing activity,” she said, highlighting how unemployment rate rose to 4.3%, vacancies were down below 1m, and job-to-job flows moderated, suggesting that workers are less confident when they consider moving to another employer. Businesses fear that when the downturn comes – the one the Bank wants to slow rising wages and inflation – it will be an unstoppable recession. A hard landing that has been avoided so far in the US but appears to be heading for the UK."
Interest rates to hit 5.5% on Thursday yet savings and mortgage rates may FALL as a result
The BoE's monetary policy committee (MPC) has hiked rates for 14 meetings in a row and a 15th is expected this week. Many analysts (including me) reckon the BoE should now hold rates rather than inflicting more pain on businesses, consumers and the housing market, but it probably won't.
Its decision may partly be determined by August's consumer price figure, published on Wednesday, one day before the BoE's monetary policy committee (MPC) meets. This could be the last BoE hike which means we have almost hit peak interest rates, which will be welcomed by almost everybody, except savers.
So how will your world change when we get there?
The UK economy has been surprisingly resilient, repeatedly refusing to collapse into recession as many including the BoE claimed it would. Yet higher rates are hurting with output shrinking 0.5% in July, more than expected, while unemployment rose slightly as companies were more reluctant to hire staff.
William Marsters, financial markets expert at Saxo said "this was surprisingly weak, the UK has technically avoided a recession but the economy is under strain."
He still thinks the BoE will hike on Thursday, as does Jason Hollands, managing director at Evelyn Partners.
"This may be the last increase but we may have to wait until the second half of next year for lower rates, dragging out the pain for investors and borrowers. Savers will be happy, though. Homeowners on variable rate mortgage should brace themselves for another jump in monthly payments after Thursday, "said Sarah Coles, head of personal finance at Hargreaves Lansdown.
For those coming to the end of a fixed-rate and looking to remortgage, the end of the rate rise cycle spells better news. "Mortgage rates have been falling lately. Assuming no major shocks on the inflation front, this may continue."
Rates will still be far higher than they were a couple of years ago, though, putting pressure on borrowers and house prices. "We may have to wait much longer for rates to retreat substantially," Coles said.
Savers have enjoyed almost two years of rocketing returns, as interest rates on best buy accounts jumped from around one percent in 2021 to 6% or more today.
Leading two-year fixed bonds nnow pay up to 6.05%, down from 6.15% in July. Five-year fixed rate bonds have topped out at 5.85%. Anyone who has been waiting for rates to go higher before fixing may find that this is as good as it gets. Today's highest fixed-rate is the National Savings & Investments one-year bond paying 6.2%, which may prove hard to beat. "The market may inch up from here, but we're not expecting anything particularly striking," Coles said.
Savers have woken up to the opportunity and are increasingly locking into best buy deals, depositing £10.1billion into fixed rate accounts in July, against an average of just £5.9billion over the previous six months.
Easy access rates pay as much as five percent and these could inch up after Thursday. If your money is sitting in an account paying next to nothing, do not wait. "It pays to switch to the best account today. You can always switch again later if rates rise much further from here," Coles said.
Pensioners buying an annuity at retirement have done radically better as rates have soared. Two years ago, a 65-year-old with a £100,000 pension might have got a level single life income of less than £5,000 a year. Today, they can get up to £7,317.
"This is great news for retirees seeking the security of a guaranteed income for life," said independent pensions expert Andrew Tully.
As with savings, annuity rates have now settled and are unlikely to climb much higher, so now could be the perfect time to lock in for life.
Delay too long and they might even fall.
Always shop around, as comparison service Annuity Ready found the difference between the best and worst annuity can be almost 10%. For someone with £100,000 that could mean an extra £15,000 over a 20-year retirement. Nobody can say for sure where interest rates will go next, but it looks like we're near the peak. As we are finding, the impact may be surprising.
Interest rates could ‘be held' at 5.5% for six months in blow for homeowners
Experts are warning that interest rates in the US could remain around 5.5% for the next six months. Rates have been raised multiple times by the Federal Reserve over the past year to mitigate the impact of inflation. Despite inflation dropping from a high of 9.1%t in June last year, many analysts believe interest rates could remain at their current level for around half a year so the effect of the hikes could be more tangible felt.
As of today, the central bank has raised the Federal Funds Rate to between 5.25 and 5.25%.
This means that homeowners and those struggling with debt repayments will continue to have to pay these hiked rates going into 2024. Brian Wheaton, an assistant professor at UCLA Anderson School of Management, is of the opinion that interest rates could remain at around 5.5% for the foreseeable future. He explained "I would suspect that holding rates at the current level for about half a year is the best approach. Empirical research on monetary policy tends to show the existence of significant 'policy lags,' whereby it takes many months or even a year for the effects of the policy to filter through the system. We won't thoroughly know the economic slowdown effects of the current 5.25-5.5% federal funds rate until we've stuck with it for several months, and the rate is now high enough (and inflation has begun to come down enough) that my view would be that a wait-and-see approach is preferable to continued rate hikes in the near term."
With inflation easing over recent months, analysts have determined a "soft landing" is likely for the US economy.
This is the term used to describe the cyclical slowdown in economic growth that prevents a recession from taking place. Unlike other G7 economies, the US has narrowly avoided this fate but the threat of rising interest rates has meant it has been a possibility.
However, despite August's hike, inflation remaining close to the Federal Reserve's desired target means a "soft landing" could be a reality. Alex Lebedinsky, PhD, an interim associate dean and professor, at Western Kentucky University, outlined why this is the likely outcome. Professor Lededinsky added "I think the current lower rates of inflation seem to suggest that the scenario in which the Fed successfully engineers the 'soft landing' is very likely. If inflation is reduced without too much effect on employment, then the economy should be in good shape - everything else being constant. The economic turmoil of the past three years was the result of the pandemic, which led to disruptions in supply and massive reallocation of consumer spending from services to durable and non-durable goods, followed by Russia's invasion of Ukraine, which affected the energy markets."