2 August 2024 last updated

Bank of England cut rates to 5pc sends yields lower and threat to annuities

Interest rates are cut by 0.25% by Bank of England to 5% sends gilt yields 19 basis points lower.

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Bank of England cuts interest rates to 5% the first drop in four years sending gilt yields 19 basis points lower and threatens annuity rates.

For the first time since 2020 the Bank of England cuts interest rates by a quarter of a percent from 5.25% to 5%.

The 15-year gilt yields reduced by -19 basis points from 4.30% to the lowest level since the start of the year of 4.13%. As annuity rates are mainly based on gilt yields we would expect a fall of -1.9% if gilt yields remain at current levels.

There was a split vote for Monetary Policy Committee (MPC) members with five members including the Governor Andrew Bailey voting to cut rates as inflationary pressures ease.

Find related news here:
Gilt yields fall 19 basis points ahead of BoE interest rate decision
Gilt yields reduce as UK inflation falls to Bank of England 2pc target

The Governor signaled the central bank will not cut interest rates too quickly as stronger evidence was required that inflationary pressures would not increase going forward.

The Consumer Price Index (CPI) reached a high of 11% last year and has since reduced to the Bank of England target of 2% in May and June with lower prices.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

The above chart shows our benchmark example for a 60 year old using £100,000 to purchase a single life and 3% escalating income is currently at £4,505 pa and this income is 66% higher than the recent low in December 2021. This reached a peak income of £4,641 pa in February 2024 and has since reduced by -£136 pa or -2.91%.

Although the overall CPI inflation has reduced to 2.0%, this could reduce further to 1.7% in two years' time and to 1.5% in three years according to the Bank of England. In contrast services inflation remains high at 5.7% in June 2024.

Other concerns of upward pressure on inflation is GDP which has picked up sharply this year and wages taking longer to unwind than they did to emerge.

CPI inflation is expected to increase to around 2.75% in the second half of 2024 as energy prices last year fall out of the annual figures leaving more persistent domestic inflation.

The Governor Andrew Bailey said the Bank needs to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much.

If interest rates are not cut quickly, gilt yields may stabilise above the 4% level and providers could reduce annuity rates by about -2% in August.

This means annuities can remain at a fourteen year high for now and gives people retiring the opportunity to secure lifetime income this month. The Federal Reserve is expected to reduce interest rates in September 2024 and gilt yields are likely to fall below 4% at that time.