Bank of England interest rates held at 5.25% for the fourth time in a row: reaction from finance experts

by | Feb 1, 2024

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Following the news that the US Fed kept interest rates on hold again yesterday, today’s announcement from the Bank of England regarding UK base rates has, as predicted, remained the same at 5.25%.

Since the Bank of England held rates in their previous announcement, speculation has been rife about whether a rate reduction was next on the cards, but apparently we aren’t quite there yet.

Even though inflation has dropped over the last couple of years, it is still above the target of 2%, hovering around 4% currently. Policymakers clearly don’t feel quite confident enough in the current economic climate to start reducing rates which is why they have held them today at a 16-year high. Steep falls in energy and fuel prices from all-time highs last year are due to reduce household bills in the coming months, but some are more keen to proceed cautiously as this reduction could accelerate a surge in inflation to higher levels again.

Votes within the MPC were split in a similar fashion to the last reviews, with a majority of 6-3 . The fact that the MPC aren’t in agreement is an indication that cuts to interest rates could come to fruition in the latter part of 2024 if the predictions on inflation become a reality.

 
 

For the time being, the industry has been sharing their reactions to today’s announcement:

Commenting on the latest Bank of England interest rate decision, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said: 

“The Bank of England has decided to maintain its policy rate at 5.25%. While there is a central case in investment thesis across the markets that the Bank of England will look to cut interest rates soon, inflation numbers released recently has put paid to that. Wages have remained strong, and while energy and food prices have fallen from their peak last year, prices remain approximately 15% higher from where they were a year ago. While the business cycle in the country remains strong with the manufacturers expecting output to increase on balance, consumer confidence remains weak, in spite of the latest uptick. 

 

All this indicates that the economy is not out of the woods yet and the expectations of cuts in the interest rates would be slightly premature. The fallout from the geopolitical issues around the Suez and the Red Sea has already led to re-routing of goods traffic to the lengthier route round the Cape of Good Hope – the impact of this has not been felt fully but on balance, should create inflationary pressures. Much as we would like interest rates to be lower, we will have to make do with the current level of interest rates for the near future.”

Lily Megson, Policy Director at My Pension Expert, said: “Maintaining base rates is not an unexpected decision – perhaps inevitable given the sticky inflation of previous months. However, it offers no clear answers for those who have felt trapped in financial limbo for the past year.

It’s impossible to say exactly when the battle between inflation and interest rates will end. However, more can and should be done to ensure those who are still struggling to plan for the future have access to adequate support.

 

It’s therefore vital that the government takes affirmative action to ensure all Britons are able to access guidance and independent financial advice. These tools will empower Britons to make informed decisions, navigate the changing economic climate, and achieve a brighter financial future.”

Nick Henshaw, Head of Intermediary Distribution at Wesleyan Financial Services, said: “During 2023, many clients will have increased their cash allocation to take advantage of rising interest rates and will now have become comfortable with the low risk profile and relatively high returns that this strategy has provided. 

However, with expectations of rate cuts now baked in, perhaps as soon as May or June, advisers must support these clients to adjust this strategy in order to maintain the same level of returns.

 

That means increasing their exposure to other asset classes, including equities. Platforms support advisers to manage balanced portfolios and will be a vital tool for providing this support to clients.

Many will be looking to the new generation of on-platform With Profits funds to provide a safe middle ground for risk-averse clients looking to reduce their cash allocation and re-engage with equities.”

Rachel Winter, Partner at Killik & Co, said: “Today’s announcement marks the fourth consecutive month of rates holding/ the first rate decrease that we have seen since March 2020. This news will be welcomed by households across the UK as it signals the potential easing of what has been an incredibly difficult time for many.

 

While we are not out of the woods yet, the current market may present an opportune moment for investing in smaller companies. While large company shares have performed well recently in anticipation of interest rates starting to come down, small company shares are still trading significantly below their 2021 levels. For example, the FTSE 100 index has made a positive return since the end of 2021, whereas the FTSE 250 and FTSE Small Cap indices are both down over 15%.

As always, it’s important that investors keep a diversified portfolio to help manage risk.”

Commenting on today’s hold on interest rates and a potential change in investor attitude, John Glencross, CEO and Co-Founder of Calculus, said: “The Bank of England has opted once again to keep the current 5.25% bank rate unchanged. This decision reflects the Monetary Policy Committee’s ongoing concern about the delicate balance act with inflation, cautioning against prematurely lowering interest rates, which could potentially reverse hard-earned progress. 

 

Investors should be prepared for a prolonged period of elevated interest rates and as such, we are seeing a change in attitude. Investors understand an overallotment of cash could be a short-term view. Calculus, as EIS and VCT managers, are investing in small companies which have the potential to grow and exit at high multiples. The current market has encouraged experienced investors and fund managers to find attractively priced opportunities as the higher bank rate has moderated valuations.”

Andrew Gething, managing director of MorganAsh, said: “The decision to hold rates is as much a response to sticky inflation, wage growth and macro-challenges, as it is a way to tell businesses and economists to hold its horses. There’s no doubt that the overall sentiment has improved massively, with a positive outlook for the second half of the year. However, the bank has to carefully balance an improving picture with a re-acceleration in spending and any potential external shocks. 

Before any potential cut, businesses across financial services in particular must stay alive to the challenges facing their customers now in a higher interest environment. The potential for customers to find themselves in a vulnerable position is very real as research continues to show the proven link between lower income and income pressures with poor health. With Consumer Duty in force and the FCA prioritising a review of vulnerability across firms, businesses must have eyes on this situation, as well ensuring that they the necessary data and intelligence to prove to the regulator that they are delivering the right outcomes. That’s particularly true for the shocking number of firms still reporting that they have no vulnerable customers.         

Affordability remains a key challenge for the coming year, especially with high levels of mortgage maturity still expected. The potential impact this could have on available income and both health and lifestyle pressures is significant. Six months on from coming into force, Consumer Duty and the treatment of vulnerable customers is still an absolute priority – the regulator is certainly making sure of it.” 

George Lagarias, Chief Economist at Mazars. Comments:  “It should be no surprise that the Bank of England maintained interest rates and echoed the Fed in terms of being carefully dovish. Inflation may be coming down but it remains volatile and geoeconomic fragmentation exacerbates that volatility. Given their failure to forecast price rises in 2021, central banks will almost certainly err in the side of caution. They can’t emit overt dovish signals unless they are fairly certain that inflation will continue to drop, less they risk losing their credibility.”

Commenting on today’s announcement on interest rates by the Bank of England, Paul Gibney Partner in LCP’s Investment team, said: “As expected, the Bank of England sat on its hands, holding the base rate at 5.25% for the fourth meeting in a row.  While December’s headline inflation level fell sharply to 4%, down from over 10% a year ago, that was not enough to persuade a majority of MPC members to vote in favour of a cut, with 6 of the 9 members opting for the status quo.

That’s not really a surprise.  Although we could see inflation drop below the Bank’s 2% target in the near term, as 2023’s early year sharp price increases fall away, wage growth – which has a significant impact on labour intensive service price inflation – remains well ahead of a level consistent with 2% inflation.  It is at least though heading in the right direction – for policymakers at least – with recently released figures showing earnings growth down to 6.6% over the three months to November 2023, well below its summer peak of 8.5%.  A continuation of that trend, against a weak economic backdrop, will increase the Bank’s ability to cut rates – but not in the immediate future.”    

Jonny Black, Chief Commercial & Strategy Office at abrdn adviser, said: “Another ‘hold’ decision – the fifth in a row – reflects the Bank of England’s desire to not act too hastily in unwinding rates amid still volatile economic conditions.

Indicators like slowing wage growth suggest that some inflationary drivers are easing. But the surprise rise in the latest CPI figures show that price rises remain strong, although are widely expected to slow in the months to come.  

All of this may mean that the Bank keeps to its ‘slow and steady’ strategy in the race to bring inflation back to target, and that the early start to rate cutting that many are hoping for won’t materialise. Advisers should be taking the time to help clients understand what future rate holds, rises or falls could mean for their plans, and to re-assure them of how their current strategies are prepared to keep delivering good outcomes, whatever the circumstances.”

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin said:

“It was a surprise to see there are still two members of the Monetary Policy Committee (MPC) voting for a rate increase. Balancing that out is one member who voted for a rate cut and the BOE has dropped its reference to the risk of further tightening. The hawkish bias from the BOE is only eased slightly compared to market expectations, as it retains its “sufficiently restrictive for sufficiently long” guidance.

The BOE’s inflation forecasts suggest there is scope for rates to be lowered later this year as it sees CPI falling to just 1.4% in 2 years if interest rates stay constant. The BOE is still relatively pessimistic on near-term growth outlook relative to economists’ consensus despite upgrades. 


“Overall, the BOE remain cautious on pre-mature easing but leaves the door open for rate cuts. The split in the MPC points to less clarity on immediate policy outlook compared to say the Fed and the ECB. The timing and extent remain highly dependent on incoming inflation data as what the BOE needs is more evidence. Traders dialled back rate cut expectations for 2024 a bit post meeting, but still expecting around four cuts starting from June.”

       

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