AJ Bell’s Laith Khalaf examines the Bank of England’s rate hold and says a December cut is now in play. With inflation judged to have peaked, he analyses a path of gradual easing toward around 3.5% as policymakers await further evidence and the Budget.
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“Black Friday deals might be all around us but the Bank of England isn’t joining in the frenzy by cutting the price of money. This puts a Christmas rate cut firmly on the cards. The Bank next meets on 18 December and moving rates down to 3.75% seems already wrapped up, especially given that four members of the committee want to see base rate at that level right now.
“For the moment then, there is no immediate boost for consumers or businesses, or a beleaguered chancellor. The good news is the Bank thinks inflation has peaked, the bad news is it doesn’t forecast CPI being back to its 2% target until 2027. That suggests only very gradual reductions in interest rates, and only to around 3.5%.
“Some members of the Bank are mindful of the downside risks posed to the economy of keeping monetary policy too tight for too long. But others highlight the risk of persistent inflation and want to see more evidence that disinflation is taking place.
“Perhaps that is code for waiting to see if the chancellor introduces any measures which could be inflationary in her forthcoming Budget. Rachel Reeves has said bearing down on inflation is one of her key priorities, but trust in politicians is wearing thin, and perhaps that applies at the Bank of England as much as anywhere else.
“This knife-edge decision isn’t likely to substantially move the dial on mortgages or savings, because a rate hold was mainly priced in. The close nature of the vote means there may be small adjustments downwards to savings and mortgage rates, but don’t hold your breath.
“The longer term picture also remains one where interest rates bottom out at around 3.5% and probably stay there for some considerable time, which means we’re not going back to the days when fixed rate mortgage deals could be picked up for under 2%. So while some relief from cost of living pressures looks like it’s on the way, expectations for a dramatic windfall from the Bank of England need to be kept in check.”
