Households face squeeze as pound tumbles to lowest level against US dollar for over a year
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Experts have warned that households may face an additional income squeeze, with potential increases in mortgage rates and some prices possibly rising. With many people already booking holidays for 2025, some travellers may find their money doesn't go as far. However, there could be a silver lining for pensioners purchasing an annuity, a type of retirement income.
Despite this, experts also highlighted the possibility for markets to regain perspective amid ongoing uncertainties. The pound has plummeted to its lowest level against the US dollar in over a year, with sterling weakening due to a deepening rout in UK government bonds, also known as gilts.
Gilt yields, which reflect the cost of government borrowing, continue to rise. This increase inversely affects the price of government bonds, causing them to fall. David Hollingworth from L&C Mortgages noted that some fixed mortgage rates have already increased due to concerns that inflation could persist, limiting the Bank of England's ability to cut interest rates "as sharply as hoped".
He added: "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.".
