Interest rate outlook - and a grumble on cash
7 Oct, 2022
Elements of feeling like we are in a very bad economic 1970s fancy dress party continued this week as it was announced that millions of British households will be asked to cut back on energy consumption this winter. Yes, we’re on stand-by for potential rolling three-hour blackouts in the “extreme” case of gas shortages and reduced electricity imports from the rest of Europe.
(For my less wrinkly readers, the 1970s saw high inflation, stagnant growth, interest rates of up to 17%, strikes, a three day week to conserve electricity, mullet haircuts, flares and Boney M. What a cocktail!)
The Prime Minister’s baptism of hellfire continued this week with the reversal of the intention to abandon the highest rate of tax, namely 45p in the £. Cutting the top rate was a startling announcement which delivered a whole world of political pain for seemingly no gain So adios to this idea.
The hangover of this most ill-communicated of ‘mini’ Budgets continued in other areas. Just yesterday, the Bank of England bought £155 million of long-dated bonds in the market, part of its emergency intervention announced last week to shore up confidence after institutional investors’ cages were severely rattled by lack of information on precisely what was funding Mr Kwarteng’s largesse. This has been largely effective and Government bonds have had a calmer week!
What’s the outlook for rates?
The big question causing many of us a whole world of pain is what to do about mortgages? To fix, or not to fix, that is the question. To understand the outlook for rates, we need first to understand the outlook for inflation.
The longer-term picture for inflation is for it to fall considerably. According to large global powerhouse Vanguard, “the energy price cap announced by Prime Minister Liz Truss earlier this month had already brought our 2022 peak headline inflation expectations down from 14% to 10%. Thereafter, we expected headline inflation readings to come down to less than 4% by the end of 2023”.
And they are sticking to this view. They also believe that interest rates will peak at around 5% next year.
Most pundits think rates will rise to around 5.5% next year
The general market consensus is that rates will rise to around 5.5%. If this is the case, for those on a tracker, every £100,000 borrowed on a standard 25-year mortgage is likely to cost about £170 a month than it does today. Ouch. However, what goes up must come down.
For what it’s worth – and I have no crystal ball and neither am I an economist – I think that 2023 looks very hard. And – to be fair – despite the bungling and recent UK-specific market volatility, which was the clearly the fault of the Government’s mini Budget Bonanza, this longer term gloomy outlook is broadly a global thing and not down to any one political party or nation.
Friends who own businesses are feeling gloomy. One runs a production company and has seen networks pulling the pin on shows which they have already started, and have sunk money into. Another who runs a service business is seeing clients pull back, with the exception of banks, who strangely enough are feeling flush (look at what they pay you on cash in your current account to work out why!). As a business owner, I can see the employment market is starting to turn. And my phone confirms that my bank account is looking bloody empty, after all the direct debits, and I’ve dug out my old American Express card again. Discretionary spend is shot. This fall in demand will curb inflation.
All of this suggests to me that interest rates will fall next year. So my personal view is that rushing to lock in a long-term fix at rates which have skyrocketed over recent weeks, feels like an over-reaction, especially if people are panicking and taking large early repayment charges on existing mortgage arrangements to do so. But I also see that the security and peace of mind offered by a shorter-term fix will feel worth it for many.
I’ve written a piece here on the Great Mortgage Conundrum which suggests the questions we need to answer, to make the right decision for our circumstances. Not easy.
A grumble on cash
A final note on cash. Spooky markets always mean people hold more cash. At the start of 2020, 10% of all assets on DIY investment platforms were held in cash. It’s 13% today – that’s about £44bn sitting in cash. Some investors are sitting on the side-lines.
For decades, stockbrokers have made money by creaming off interest on our cash. And paying us diddly squat. Now interest rates are back up off the floor, this quiet revenue stream for the platforms is back in town.
I had an email from Interactive Investor this week confirming that the interest rate on cash balances of less than £10,000 is 0%. Wow! I am bowled over!!! To be balanced, I checked with Hargreaves. It’s 0.1% for cash in an ISA up to the first £10,000. And 0.15% for the first £10,000 of cash held in a pension. Finally at AJ Bell, it’s 0.15% on the first £10,000 in both ISAs and pension.
For those with chunkier cash balances, the rates go up to a maximum of 0.5% at AJ Bell (for £100k+ cash in a pension), 0.75% at HL (for £100k+ cash in a pension) and 1% (£10k+cash in a pension) at Interactive Investor.
So here’s the beef. A) It’s not enough. B) Why all the complicated tiers? C) Why can I not easily find this information out?
£44 billion of cash, most of which will be earning at least 2% less than the base rate, is nearly £1 billion in interest consumers are missing out on. If anyone is being paid decent rates by their investment provider, do let me know. And if you’re not – tell them off, or let me know. It’s an old game, it’s not fair, and it’s not clearly disclosed enough.
Have a good weekend everyone.
Holly
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