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Does Kwarteng's tax U-turn mean interest rate won't rise to 6% as predicted?

interest rates Governor of the Bank of England Andrew Bailey. Photo: Dan Kitwood/AFP via Getty
Governor of the Bank of England Andrew Bailey is expected to raise interest rates again in November. Photo: Dan Kitwood/AFP/Getty

Markets are no longer pricing in 6% interest rates by next year as the government scrapped the abolition of the 45p top tax rate.

Traders are now predicting interest rates to hit between 5.5% and 5.75% by next year.

The current Bank of England base interest rate sits at 2.25%, after it was increased in September. This rate affects how much banks charge for borrowing including mortgages, loans and credit cards.

Bank governor Andrew Bailey said the Monetary Policy Committee, which sets rates, would assess the impact on inflation and the fall in sterling at its next meeting in November, and then "act accordingly".

Threadneedle Street has already hiked rates seven times in a row since December to the highest rate in 14 years.

Read more: Bank of England: What will the emergency action actually do?

UK chancellor Kwasi Kwarteng’s plans to cut taxes spooked markets and amid fears of pensions funds collapsing, along with expectations of an aggressive rates rises.

The Bank of England was forced step in to prevent the bond market from entering a downward spiral.

The BoE's £65bn intervention in the bond market on Wednesday followed warnings of cash calls in the pensions market that could potentially spark mass insolvencies.

Interest rates are expected to climb sharply as the BoE attempts to control inflation (Yahoo News UK/Flourish)
Interest rates are expected to climb sharply as the BoE attempts to control inflation (Yahoo News UK/Flourish)

Myron Jobson, senior personal finance analyst at Interactive Investor, explained what this U-turn could mean for your personal finances.

“The hope is the volte-face will steady the ship. Homeowners and wannabe buyers will hope for a reprieve in the mortgage marketplace, which has seen a number of lenders shut up shop for new customers, with many more hiking rates on deals,” she said.

Read more: How a sinking pound will inflate mortgage debt for millions

“What all this means for personal finances is unclear – but much still remains uncertain for all of us,” she added.

Guy Foster at RBC Brewin Dolphin said: “The derivatives market is now signalling one less rate increase since this U-turn on additional rate tax."

Interest rates of 6% would have been the highest in decades. Still, homeowners whose fixed-rate mortgage deals are running out, or who are on trackers or variable rate deals, still face a sharp jump in their repayments.

Mortgage rates are set to soar as the Bank of England raises interest rates (Yahoo News UK/Datawrapper)
Mortgage rates are set to soar as the Bank of England raises interest rates (Yahoo News UK/Datawrapper)

According to UK Finance around 1.8 million homeowners will come to the end of their fixed-rate deal in 2023.

Before the mini-budget, markets had expected interest rates would have risen to 4.5% by next spring.

The Resolution Foundation said that for a homeowner with a £140,000 mortgage, rates rising to 5% could mean monthly payments increasing by around £190, relative to rates remaining at 2.25%.

The Bank of England is widely expected to take drastic action at its next interest rates meeting in November to bring rampant inflation back to its 2% target.

Read more: Bank of England steps in to buy UK bonds to stem market turmoil

Victoria Scholar, head of Investment at Interactive Investor said: "[The Bank of England] is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment.

The choice of mortgage products on the market fell sharply following the mini-budget, as many lenders pulled deals off the shelves and re-priced their products upwards.

For some home-buyers, higher mortgage rates could outweigh any stamp duty savings they may stand to make.

Read more: Pound run: BoE chief economist signals 'significant monetary response'

According to Moneyfacts.co.uk, there were 2,262 residential mortgage products available on Monday October 3, down from 3,961 on the day of the mini-budget.

Paul Johnson, director of the Institute for Fiscal Studies, has warned that the U-turn it will have little effect on the country's finances.

He said that the controversial measure was worth £2bn in a £45bn tax-cutting package. Therefore, he says it will have "essentially no effect on fiscal sustainability".

Schroders' head of UK equities, Sue Noffke, noted that approximately one third of UK homeowners are mortgage-free and may benefit from a rise in the interest payable on their savings.

"As a result, luxury goods companies could be net beneficiaries of increased wealth," she said.

Watch: UK's Truss forced into humiliating tax U-turn