UK interest rates have been cut today by the Bank of England for the first time in 4 years. Good news for sure!
Following the welcome news that headline UK inflation had – at long last – fallen to the Bank of England’s target of 2% in the year to the end of June, hopes and expectations were set high that today’s meeting of the Monetary Policy Committee would lead to UK interest rates being cut by 0.25% from their previous rate of 5.25%.
However, today’s cut was clearly a knife-edge decision for the MPC. This was mainly because services inflation has remained stubbornly above target, giving concern that this might fuel the inflation fire, and lead to the headline rate resuming an upward path in the months ahead. Clearly a tricky balancing act for the Bank, not wanting to cut too early and risk the inflation spiral returning but wary that if things are slowing, then a time lag exists before a rate cut can impact the underlying economy
Experts from across the financial services sector have been sharing their reaction to today’s interest rate news, on what it means for the economy, for investment markets for borrowers, savers and for clients’ financial planning overall, as follows:
Jonny Black, Chief Commercial & Strategy Officer at abrdn adviser, said: “This ends a streak of 14 consecutive hikes, and brings interest rates down from their more than 15-year high.
“While it signals that ratesetters are currently comfortable with inflation’s trajectory, it’s uncertain whether this will translate into more rate cuts soon. The Bank will be closely monitoring inflation risks – like wage growth – and with it already expecting inflation to start to accelerate again before the end of the year, it won’t want to risk premature action stoking this any further.
“Advisers will play a pivotal role in helping clients understand what will influence future rate decisions and re-assuring them that their strategies are poised to succeed in a lower rate environment.”
Mr Sarwar Khawaja FRSA, chairman, executive board, Oxford Business College, said: “Members in favour of an interest rate cut won the race in a photo finish, and they deserve a gold medal for giving Great Britain’s economy a boost.
“This is the first rate cut since the pandemic began in March 2020, signalling that the Bank of England is finally winning its long war against inflation.
“This reduction might seem modest, but it sends a powerful message that the Bank believes inflation is now sufficiently under control to ease monetary policy. However, the narrow 5-4 vote suggests there’s still caution among policymakers about potential inflationary pressures.
“For businesses, this cut could mean slightly cheaper borrowing costs, potentially stimulating investment and growth. However, they shouldn’t expect a rapid series of cuts, as the Bank appears keen to move cautiously to avoid reigniting inflation.
“The decision reflects a delicate balancing act between supporting economic growth and keeping inflation in check. While this cut is a positive sign, businesses and consumers should remain prepared for a gradual, rather than dramatic, shift in interest rates over the coming months.
“As always, the devil will be in the details of the Bank’s forecasts and forward guidance. Businesses would do well to closely monitor these for insights into future rate movements and economic conditions.”
James Norton, Head of Retirement and Investments, Vanguard Europe said: “Today, the Bank of England cut the headline Bank Rate for the first time in four years. Interest rates have an impact on everyday finances as they represent the cost of borrowing, which feeds through in areas like the cost of mortgages and personal loans.
“Investors, however, should avoid trying to second guess the effect on markets and tune out the noise. Interest rate hikes are often predicted well in advance and are usually already factored into the price of investments. As a result, changes in interest rate expectations tend to have a greater impact.
“Ultimately, the economy will go through different interest rate cycles, and interest rates are just one factor driving investment performance, so basing investment decisions on interest rates alone is unlikely to be a wise move.
“We think it’s better to maintain a balanced portfolio – one that contains the right mix of shares and bonds and spreads money across different regions and sectors – and hold it through the cycle. By sticking to an investment plan and maintaining a long-term outlook, investors give themselves the best chance of advancing their financial goals.”
Nick Henshaw, Head of Intermediary Distribution at Wesleyan, said: “This rate cut has been expected for some time and we know through our research that most advisers have already taken steps to increase their clients’ exposure to equities in anticipation.
“It remains to be seen when there is likely to be further reductions in the months ahead, particularly given the uncertainty over the trajectory of inflation, but in the meantime advisers can take steps to help their clients manage the transition to a lower interest rate environment. One potential option is smoothed funds, which can provide a middle ground for clients as they continue to reduce their cash allocation by reducing volatility and helping to moderate risk.”
, Nathan Emerson, CEO of Propertymark, comments: “Today’s rate cut it is excellent news for the housing market and no doubt a huge sigh of relief for those who have felt the pain of higher interest rates for the last two years. Summer is traditionally a busy time of the year for the housing market, and today’s base rate cut should hopefully provide a new wave of confidence and affordability for many. With a new government in power that is committed to delivering near two million new homes Propertymark hopes today news is a real turning point for homeowners and those who aspire to buy.”
Tim Graf, Head of Macro Strategy, EMEA at State Street Global Markets said: “The narrowness of today’s vote to cut rates and accompanying commentary highlight how deliberate the easing process will remain for the Bank of England over the remainder of 2024. In meeting market expectations for a cut but sounding relatively hawkish, we would expect any follow-on weakness in sterling to be limited. To this end, the institutions we track in our flow metrics have been strong buyers of the pound in recent weeks. Lower rates challenge these flows somewhat, but sterling still enjoys a yield advantage against most G10 currencies and we do not see this as too dovish an innovation to challenge those flows.”
Karen Barrett, CEO and Founder of Unbiased, said: “After months of waiting, the Bank of England (BoE) has finally cut the base rate, offering much needed relief to millions of households that have been struggling.
“This decision symbolises a significant turning point for our country – economically and psychologically – and raises hopes that this could be the start of our journey out of the woods.
“Meanwhile, existing and potential homeowners may continue to benefit from the mortgage price war, with a recent highlight including Nationwide becoming the first lender to reintroduce sub-4% rates since February.
“For those on a variable-rate mortgage,monthly payments will likely fall immediately following the base rate cut. Savers should also prepare for the eventuality that rates will now start falling.
“It’s also worth considering an annuity, as rates have risen to over 7%, according to Standard Life’s annuity rate tracker, but these are also linked to the base rate, so make sure to lock one in before they fall.”
Tom Stevenson, Investment Director, Fidelity International, comments: “The Bank of England has pipped the Federal Reserve to the post, cutting interest rates after a knife-edge decision that saw a 5-4 split on the Monetary Policy Committee. The 0.25% reduction in interest rates to 5% is the first cut in the cost of borrowing since the pandemic and follows a year in which rates have been held at a 16-year high of 5.25%.
“The Bank’s commentary confirmed the challenge it has faced in deciding whether to cut rates. Although inflation has been at its 2% target for two consecutive months, the Bank said it expects it to rise to 2.75% in the second half of the year. On growth, while GDP has risen quite sharply this year, the Bank recognised that underlying momentum is weaker. The US central bank held interest rates at between 5.25% and 5.5% last night, but indicated that if inflation continues to moderate in line with expectations it will also cut at its next meeting in September.
“The Bank’s move towards easier policy has already triggered some reductions in mortgage rates and activity in the housing market has started to pick up in anticipation of cheaper loans. Nationwide said today that house prices had risen for the third consecutive month in July.
“Stock markets have welcomed the interest rate pivot. In the past week, the FTSE 100 has risen by 2.6% to within a whisker of its all-time high of 8,446, struck in May. Falling interest rates reduce the attraction of holding sterling assets, however, and the pound has given up some of its recent strength against the dollar. After the announcement, it traded at $1.2778. down more than 0.5% on the day. The pound briefly topped $1.30 a month ago. The yield on government bonds fell below 4%, as investors anticipated further cuts in interest rates to come. The 10-year bond yields 3.95%, down from the peak of 4.75% last summer but still higher than the 3.43% low hit in December.
“Investors will be considering how to adjust their portfolios following today’s cut in interest rates. Fidelity investors have recently favoured a bar-bell approach, investing in both high-growth global technology funds but also defensive money market cash funds. While cash rates are likely to fall from their current levels, they remain high by recent historic standards. At the same time the stock market has seen a significant rotation out of the technology stocks that have led the market higher and into previously out of favour smaller companies.”
Hetal Mehta, Head of Economic Research at St. James’s Place, comments: “This was clearly not a straightforward policy move, as evidenced both by the vote split and the finely balanced nature for a number of MPC members. The Bank of England does expect inflation to nudge up again before coming back down.
“The pace of cuts will become an increasing part of the debate, but big and/or back-to-back moves would be reserved for an economic shock. The overall tone is in line with the policy normalisation we have been anticipating.”
James Burgess, head of commercial and insolvency expert at Atradius UK, says: “Having held interest rates at a 16-year high of 5.25% for an entire year, businesses and consumers across the UK will be relieved at the outcome of today’s announcement with rates falling to a welcomed 5%.
“This positive outlook for the economy is also reflected in our own claims data with an overall decline of 17% in late and failed payments in Q2 2024 compared to Q1 2024. This trend has continued into the construction sector, following a 28% decline in late and failed payments in the sector in Q2 2024 compared to Q1, showing a step in the right direction for the sector following today’s rates cuts. This will also be welcome news to homeowners as the cut in rates alleviates their financial burdens around mortgage payments, putting the construction and housing sectors in an improved position as we progress through the second half of the year.
“For businesses, this news will mean that they can navigate the summer season with more confidence. Consumers may feel less restricted in terms of spending as this cut in rates could start to loosen purse strings. As well as a boost to consumer spending, business confidence and investments may improve over the coming months.
“Whilst we are not out of the woods yet, the outcome of today’s announcement is certainly a step in the right direction for the UK economy, offering hope as we move through the remainder of the year. With inflation rates remaining at their target of 2% and interest rates sitting at 5%, it’s safe to say that the economic position of the UK is improving. However, despite falling rates, the unpredictability of major world events, not least geopolitics and fears of war between Iran and Israel, mean it’s essential that businesses remain vigilant and protect themselves against the domino effect of insolvency with proactive financial planning. This includes increasing liquidity, diversifying supply chains, and protecting vulnerable credit agreements with trade credit insurance.”
Rob Morgan, Chief Investment Analyst at Charles Stanley said: “Today’s BoE interest rate decision was always going to be a close call and so it proved. Ultimately the balance of the rate setting committee at the BoE opted to make a cut for the first time in over four years.
“Looking at the inflation data there is perfect logic to this. Following almost three years of above-target rises, inflation has fallen to 2% in the past two months, and this more subdued picture overall was enough to convince the balance of voting members of the MPC the coast is clear to start the rate cut journey.
“However, the benign façade of headline inflation masks more complex and concerning trends. Almost all the heavy lifting has been done by falling goods prices, while in services the inflationary embers continue to burn and this could mean further cuts are limited.
“Services inflation has remained stubborn thanks to sensitivity to robust wage increases, and both are rising at an annual 5.7% according to the latest readings. Until these embers show signs of dying out more concertedly the BoE is going to have a problem justifying more significant rate cuts.
“While wage pressure could ease, there are also risks they could re-accelerate. Public sector workers have recently been granted pay rises, while the 9.8% increase to the living wage in April continues to inflate the year-on-year numbers. Meanwhile, although wage pressures could ease further, there are also risks they could re-accelerate as public sector workers are granted pay rises and increases to minimum wages in the spring inflate the year-on-year numbers.
“Economic growth has also been a little stronger than anticipated, adding to the inflationary brew and the likely reticence of MPC members to make more significant cuts. GDP grew by 0.7% in the first quarter of this year, or 2.8% annualised, as the economy rebounded from a mild recession in the second half of 2023. Consumer confidence has so far held up despite the rapid increase in interest rates, and policymakers will not wish to risk a fresh resurgence in household spending rekindling price rises.
“Many households and businesses will be hoping for further interest rate cuts, which would more significantly relieve pressure on those with variable rate mortgages in particular. However, cuts will only be fine tuning rather than deep, owing to the stickiness of inflation and wage growth. It will therefore be a case of continuing to battle against high borrowing costs relative to recent history.
“Overall, following today’s more we will likely see a shallow trajectory of cuts, perhaps at a roughly quarterly pace, towards the 4% level next year. There could be a faster cutting cycle only if growth disappoints or inflation becomes more firmly subdued, which looks unlikely.”
Lily Megson, Policy Director at My Pension Expert said, “In a broader sense, today’s decision to cut interest rates after a year of holding them steady is a clear recognition of the improvements in our economy. Inflation has wreaked havoc on people’s finances and curbing it has been the top priority.
“However, while a welcome relief for borrowers, the road ahead remains tough for savers and those preparing for retirement. Crucially, prices are still high; the cost-of-living crisis isn’t over yet.
“As conditions start to stabilise, many will be eager to get their savings goals back on track. But it’s key not to make any hasty decisions. For instance, some might be tempted to quickly buy an annuity, as annuity rates may fall in response to the lower interest rates. However, such decisions should always be made with careful consideration.
“Creating economic stability is vital, but equally important is supporting individuals in their financial planning. Savers need to be informed and cautious – providing access to financial education and advice to respond to these changes effectively and secure their financial futures should be the top priority for the government.”
Helen Vieira, Head of Banks at Flagstone International comments: “For many this cut has been a long time coming. We are one year on from when the Monetary Policy Committee (MPC) increased base rate to 5.25% to combat rampant inflation in the UK. Speculation was reaching fever pitch as to when they would start to loosen that fiscal grip. Clearly that time is now.
“Despite the Government commitment this week to public sector pay increases and the ongoing volatility of food and energy prices the Bank of England has shown it feels reassured enough that the fires of inflation have been extinguished sufficiently as the last inflation data showed it had hit it’s 2% target.
“Whilst central banks across the world will move with caution, the direction of travel now is set toward rates coming down further in the short to mid-term. Therefore, for those managing cash deposits internationally rates offered on cash vehicles will also start to tick down across many jurisdictions. It’s important to stay informed and ready to take advantage of the best returns as we reset toward a new normal.”
