Sharing his analysis and reaction to what today’s interest rate cut means for markets, mortgages and savings, Laith Khalaf, head of investment analysis at AJ Bell, said:
“This interest rate decision was widely anticipated, but the path to future cuts has been muddied by Rachel Reeves’ Budget and the election of Donald Trump as US president. Both these events have the potential to be inflationary, which would mean interest rates staying higher for longer. That doesn’t necessarily imply rates won’t come down, but the pace of decline is likely to be slower.
“The market is still pricing in another rate cut either in December or February, and then another one by May 2025. There are some more bullish voices out there, including Goldman Sachs who have forecast UK base rate to fall to just 2.75% by next Autumn. The fact the decision to cut rates was almost unanimous will put some powder in this argument. But if Donald Trump pushes ahead with a restrictive trade policy, that would really put the cat amongst the pigeons when it comes to UK inflation and interest rates.
“The Bank of England has delivered some good news for Chancellor Rachel Reeves to cling on to, as they revised up their forecast for growth over the next 12 months. This was upgraded from 0.9% to 1.7%, with the Bank saying that the Budget policy measures were responsible for almost all of this uplift. However, the Bank downgraded its growth forecast for the following year and thinks growth will be only 1.4% in three years’ time, which doesn’t imply any step-change in the UK’s economic prospects. It’s not so much ‘growth, growth, growth’ as growth, less growth, meh.
“The Bank also said it expected the Budget to raise inflation by just under 0.5% in the short term, while also forecasting CPI to come in just below target in three years’ time. While that might mean mortgage rates staying a smidge higher as a result of the Budget, it suggests the effects will not be substantial or long lasting. Indeed, UK mortgage borrowers may well have more to fear from a Trump presidency than they do from our own chancellor.
Mortgages and savings
“The big question on most people’s lips is how the Bank’s latest decision will now feed through into mortgage and savings rates. Seeing as the rate cut was almost fully priced in, we shouldn’t expect a change in fixed rate mortgages and savings bonds immediately. We’ve already seen a material drop in fixed rate mortgage costs this year, with the typical rate falling from 5% to 4.4%, according to Bank of England data (based on a 75% loan to value). Meanwhile the typical one year savings bond has fallen back from 4.9% to 4.1% this year. Fixed rates are more dependent on longer-term rate expectations, especially when a move has been priced in like this one. Variable rates on savings and mortgages on the other hand should fall back as a result of this latest interest rate cut.
“While there are definitely risks to the inflationary environment, the question over future rate cuts appears to be when rather than if. Monetary policy remains restrictive, which means the Bank can put downward pressure on inflation by just sitting on its hands. The central case remains that interest rates fall gradually from here, which would provide small increments of relief for mortgage borrowers and a steady decline in returns for cash savers.”
