Households may face a further income squeeze, say experts
Mortgage rates, prices of goods and retirement annuities may potentially be affected by recent market movements.
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Your support makes all the difference.Households may face a further income squeeze, with the potential for upward pressure on mortgage rates and some prices perhaps becoming more expensive, experts have said.
With many people currently booking breaks for 2025, some holidaymakers may not see their money stretch as far, although there may also be a “bright spot” for pensioners buying a retirement income called an annuity, it was suggested.
However, some also emphasised that there is also room for the “markets to gain a bit of perspective” and that uncertainties remain.
Swap rates look set to edge up further, which will put further upward pressure on fixed rates
The pound has tumbled to its lowest level against the US dollar for over a year, with sterling weakening amid a deepening rout in UK government bonds, also known as gilts.
Yields on government bonds, which reflect the cost of government borrowing, have continued to rise.
The rise in gilt yields has an inverse effect on the price of government bonds, which are falling.
David Hollingworth, from L&C Mortgages, said some fixed mortgage rates have already edged up amid concerns that inflation could remain higher for longer, curtailing the ability for the Bank of England to cut interest rates “as sharply as hoped”.
He said: “Swap rates (which lenders use to price mortgages) look set to edge up further, which will put further upward pressure on fixed rates despite there being a mix of ups and downs in the early stages of the new year.
“Given the sharp pricing that lenders have been employing there will be only so much that they will be able to absorb before any further rises hit fixed-rate mortgages.
“In the current market it looks sensible for any borrowers looking to arrange a new fixed rate to secure a deal sooner rather than later, starting the process a good three to four months ahead.
“That will mean they secure a deal and avoid any potential hikes to rates but will still have the ability to move to a better rate if there is any subsequent improvement before completion.”
For those retiring, a relatively bright spot could be improved annuity rates which provide retirees with a guaranteed income for life and which are heavily influenced by gilt yields
Matthew Ryan, head of market strategy at global financial services firm Ebury, said elevated gilt yields are likely “to be reflected in higher mortgage rates, which would provide a further squeeze on household disposable incomes”.
The gilt rout has been sparked by investor worries over rising government borrowing and concerns around the potential for stagflation, where the economy sees rising inflation combined with stalling growth.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said the bond market in the UK has reacted “dramatically – more so than other markets around the world”.
She added: “In the coming days this could subside if the bond markets decide they’ve got a bit ahead of themselves. There are no guarantees, but the strength of the immediate reaction means there’s room for the markets to gain a bit of perspective. If that happens, we’ll see yields drop again.
“Mortgage lenders will still have some loans on their books, so they don’t need to go to the swaps market for more fixed rates every day. It means yields may have fallen back a bit by the time they do.
“Of course, there are no guarantees. If more worrying news comes out of the US, or fears of stagflation spread, bond yields could remain higher, and if this happens, there’s more of a chance it will be reflected in higher mortgage rates.”
Jason Hollands, managing director of wealth manager Evelyn Partners, said: “Markets have essentially been factoring in a combination of stickier inflation, a more modest pace of rate cuts than hoped for only months ago, and, importantly, appear to be taking a dim view of UK growth prospects.
“This all comes ahead of a year of anticipated significant new gilt issuance and is therefore clearly bad news for (Chancellor) Rachel Reeves.”
In the UK, weaker sterling will make foreign imports look a bit more expensive, potentially impacting some food and energy costs as well as meaning higher expenses for any US-bound holidaymakers
He said the “big question” is whether the rise in borrowing costs is a temporary spike, “or proves to be more long lasting, resulting in a long-term shift in government borrowing costs. It is simply too early to know”.
An improvement in UK growth figures over the coming months could ease market concerns and see yields come back, he said, adding: “However, should the recent rise in bond yields turn out to be more than a flash in the pan, there are a number of potential personal finance implications.
“These include the prospect of the Chancellor needing to engage in further tax rises, an increase in mortgage rates and, for those retiring, a relatively bright spot could be improved annuity rates which provide retirees with a guaranteed income for life and which are heavily influenced by gilt yields.”
Lindsay James, investment strategist at Quilter Investors, suggested consumers may potentially see rising prices, with holidaymakers potentially affected by weakened sterling.
She said: “Theoretically, if yields were to continue to rise, which is by no means certain, then new loans taken out by corporates would be more expensive.
“This could be passed on to customers through higher pricing. However, a lot of companies raised money at lower rates and interest costs would not be affected until the point of refinancing.”
She added: “In the UK, weaker sterling will make foreign imports look a bit more expensive, potentially impacting some food and energy costs as well as meaning higher expenses for any US-bound holidaymakers.”