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."
Matthew Ryan, head of market strategy at global financial services firm Ebury, highlighted that soaring gilt yields are expected "to be reflected in higher mortgage rates, which would provide a further squeeze on household disposable incomes". The recent turmoil in gilts has been fuelled by investor concerns over increased government borrowing and the threat of stagflation – a toxic mix of high inflation and stagnant economic growth.
Sarah Coles, head of personal finance at Hargreaves Lansdown, observed that the UK bond market's reaction has been "dramatically – more so than other markets around the ".
She suggested a potential easing of tensions: "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 still hold some loans, so they don't need to visit the swaps market daily for more fixed rates. This means yields might have dropped slightly by the time they do. Of course, there are no guarantees. If more worrying news emerges from the US or fears of stagflation spread, bond yields could remain high, and if this happens, there's a higher 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) ."
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."
Lindsay James, an investment strategist at Quilter Investors, highlighted the mixed bag of prospects Brits may face financially, including potentially higher taxes and mortgage rates. She pinpointed a silver lining for retirees, with better annuity rates, which are driven by gilt yields, saying: "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."
She commented: "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."
Moreover, she noted the broader implications of a weaker sterling on the cost of living, adding: "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."
