With UK inflation data yesterday revealing a better than expected figure of 3.4% to the end of February, its lowest level for over two years, a figure which was sharply down from its peak. It put pressure on the Bank of England’s Monetary Policy Committee (MPC) who had much to consider at their meeting today, but decided to keep rates on hold.
The market had been expecting that the Bank of England (BoE) would keep UK interest rates unchanged at 5.25% – a sixteen year high level. The Bank of England has been clear in statements in recent weeks that it will be looking to a sustained fall in inflation to its target level of 2% before it would be confident enough to start cutting rates.
The big question on everyone’s mind is when such cuts are likely to happen, with knock-on consequences being particularly serious for mortgage holders struggling with the cost of living crisis.
With Governor Andrew Bailey set to make his statement later, advisers and investment managers will have a better idea after that of the Bank’s thinking and of when they might begin to reduce rates giving much needed relief to mortgage holders and business owners alike.
Finance experts have been sharing their reaction to today’s interest rate news from the BoE as follows:
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 the headline rate at 5.25%. This comes as no surprise to market practitioners, who not only have incorporated this current pricing but are also busy working out the impact of interest rate cuts, going forward. This shift was fuelled even more by the Chairman of the Bank of England, Andrew Bailey in his recent comments, wherein he stated that inflation does not need to “come back to target before we cut interest rates”. While inflation eased on the back of lower food prices and the economy stagnating, it is evident rate setters are faced with a dilemma – whether to keep a check on inflation by leaving rates as they are, and risk pushing the economy into recession or cut rates to fuel growth at the risk of burgeoning inflation. To add to their woes, this being the election year, there is a great pressure to concoct an environment to support giveaways. This puts the rate setters in an unenviable position of having to walk a tightrope while being buffeted by high winds. As we all know, economics is not about the immediate but its lasting impact – only the results, and not the intentions of the decisions that will be made, will give us cause to criticize or celebrate.”
Charles Younes Deputy CIO at FE fundinfo, said: “The maintenance of the interest rates from the Bank of England is no surprise, and follows the trajectory from the latter half of 2023. Bond investors will remain dovish and press ahead with their already formulated predictions.
“As is often the case in the UK, the monetary transmission mechanism is fast-efficient due to the specifics of the housing market, given the timeframes at which people re-mortgage their properties. The BoE needs to take its resilience into consideration before initiating its easing cycle.”
William Marshall, Chief Investment Officer, Hymans Robertson Investment Services (HRIS) says: “Wednesday’s inflation news would have pleased the members of the Monetary Policy Committee as the data continues to make good progress towards target. Today’s meeting was always going to be a hold in interest rates, but the prospects for a rate cut in Summer have improved. That being said, the last piece of the jigsaw continues to be the labour market. Wage growth north of 5% means a risk of further inflationary pressures remains.
“The data is moving in the right direction albeit slowly. Given the added uncertainty over the validity of the ONS Labour Force Survey it’s reasonable that the MPC will want to wait a bit longer before cutting. Falling inflation and the expectation of lower interest rates help to boost asset prices. Although cash rates are high now they are expected to fall, making assets like bonds where investors can lock in high yields look more attractive.”
Rob Clarry, Investment Strategist at Evelyn Partners, the wealth management group, comments: “As anticipated, the BoE held the base interest rate at 5.25%. But today’s change in votes signals that we are getting closer to interest rate cuts. Haskel and Mann, longstanding hawks, dropped their votes for higher rates, making this the first meeting since September 2021 with no votes for higher rates.
“Moreover, the softer than expected February inflation print should give the monetary policy committee (MPC) more confidence that inflation is on the right track. CPI rose by 3.4% in the 12 months to February 2024, down from 4.0% in January. The largest downward contributions to the CPI annual rate came from food, and restaurants and cafes, while the largest upward contributions came from housing and household services, and motor fuels. Although the services component of CPI remains elevated at 6.1% year-on-year, and the MPC will want to see more progress on this measure before they commit to a rate cutting cycle.
“On the growth side, the data is showing tentative signs that UK economic growth might be turning the corner. The UK composite PMI reading for March was 52.9, marking the third month in a row above 50 (50 signals expansion vs the previous month). This implies that the technical recession experienced in the second half of 2023 is now over.
“Today’s meeting doesn’t seem to have materially changed the calculus for money market traders, although the probability of a June rate cut has increased to 70% from 50% at the start of this week. The market took the decision and communications as dovish, with sterling weaker against the US dollar and gilt yields falling across the curve.”
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Any predictions that yesterday’s inflation announcement would precipitate a drop in the base rate were optimistic – the Bank of England has not bowed to pressure to cut rates in recent months, and it is likely to still be wary of a potential uptick in inflation thanks to tax cuts and minimum wage rising in the coming months.
“Interest rates will come down soon enough, with most experts anticipating a cut in June, or at the latest August. But this won’t mean blue skies all around. While higher interest rates remain a major issue for debtors and mortgage holders, the cost of living is still untenable for many households thanks to slowing wage growth and prices – especially for food – still rising.
“Now is not the time to reduce the base rate; the risk that inflation will rise again is still too great. For those in a position to do so, now is an opportune moment for consumers to take advantage of the available savings opportunities, as we should expect rates to fall as we move closer to the Bank’s eventual decision to cut the base rate.”
Lily Megson, Policy Director at My Pension Expert, said: “Yet another hold in the base rate may feel bittersweet for Britons. On the one hand, remaining quite so high is symptomatic of the plague that rampant inflation has inflicted upon people’s finances. On the other, with rates likely to have reached their peak ahead of a steady decline in coming months, savvy savers might take their last chance to capitalise by investing in fixed-term products like annuities or bonds.”
“However, it’s important that consumers don’t make any rash decisions. This rollercoaster of ups and downs tells us one thing: the current financial landscape is nothing short of nightmarish to navigate. It’s important Britons weigh up their options and their individual circumstances when selecting products that can pave the way for a brighter financial future – which ultimately means the government taking action in ensuring access to better financial education, independent financial advice and guidance for all.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Today’s pause in interest rates was widely expected and will add to the settled nature of the annuity market. Annuity incomes soared throughout 2022 as the Bank of England hiked rates, before settling down during 2023. Despite concerns about their future direction, they’ve been slowly on the rise again this year, with a 65-year-old with a £100,000 pension currently able to get up to £7,430 from an annuity according to the latest data from HL’s annuity search engine. With an interest rate cut not due on the horizon for another few months they continue to offer really good value and interest in them will continue to grow.”
Andrew Gething, managing director of MorganAsh, said: “While many would have hoped for a cut, holding base rate at 5.25% was always the most likely outcome. Even with positive headlines around inflation yesterday, the MPC will have one eye on high services inflation, as well as number of macro challenges that could still upset the apple cart.
“Although a fifth consecutive hold brings stability, it also keeps interest rates at an elevated level – adding further pressure onto customers and potentially pushing many into a vulnerable position. With predictions of August bringing the first cut to base rate, this strain on households is only set to continue. It’s no wonder then that the FCA has this week announced its review of how firms approach consumer vulnerability, especially as many continue to say they have few – or even zero – vulnerable customers.
“If the base rate does fall in August, as many predict, firms will have to report on outcomes for vulnerable customers ahead of this – with July marking the one-year anniversary of Consumer Duty. A proactive approach to assessing all clients is absolutely critical in generating the necessary data firms need for the management information and reporting the regulator will require.”
Jonny Black, Chief Commercial & Strategy Officer at abrdn adviser, said: “This is now the fifth time in a row that the Bank of England has held rates.
“A cut is still expected this year, although exactly when is still hotly debated. Some quarters suggest that rates could start coming down as early as June, but other indications point to the Autumn. What’s for sure is that the Bank won’t act until its confident that the now diminishing fire of inflation won’t be blown back into full flame. Yesterday’s fall in inflation shows things are moving in the right direction.
“Lower rates won’t be uniformly ‘good’ or ‘bad’ for clients. Last week, a BoE survey into UK households’ attitudes around inflation found that although nearly a third of people said it would be better for them if interest rates were to go down, nearly a quarter would benefit more from a further hike. To me, this highlights just how much clients are going to value their advisers’ support in navigating whatever lies ahead. Some won’t perceive one or other outcome as in their best interests, and advisers have a role to play in explaining how their strategies are already designed to still deliver for them in the long-run, or what changes they will need to make to keep their goals in sight.”
Laith Khalaf, head of investment analysis at AJ Bell, comments: “It seems pretty clear the Bank is deciding when, not if, it should cut interest rates. Latest forecasts from the OBR suggest that inflation will hit target in the next few months, and if it does, the central bank will come under tremendous pressure to reduce rates. Since the start of the year, financial conditions have actually tightened, as expectations for interest rate cuts have been pared back. The key two year interest rate swap which informs the pricing of fixed rate mortgages is up to 4.6% from 4.3% in January. But this highlights how much markets got ahead of the curve at the beginning of the year. If we look back to August 2023, the swap rate stood at 6%, so there has been a considerable easing of financial conditions as inflation has fallen away. In anticipating interest rate cuts, markets have already done some of the heavy lifting in providing relief to businesses and households.
“The residents of Downing Street will be hoping for rate cuts sooner rather than later. Whether lower mortgage rates will shift the electoral calculus is questionable, but they can’t hurt. Lower borrowing costs could also potentially open up some wiggle room in the public finances, so if the central bank surprises markets by cutting rates aggressively, the government might be tempted to hold another fiscal event ahead of the election to spend the extra pennies on more sweeteners. So far though, the Bank isn’t making especially dovish noises which would suggest it’s going to shock markets by loosening faster than expected. However, the two hawks who had been agitating for an interest rate hike have now re-joined the herd and are happy with keeping rates on hold.
“While inflation is looking much more benign, it remains high enough to require the governor of the Bank of England to pen a letter to the chancellor explaining why CPI is so far above target. The labour market still looks pretty tight, and wages are now seeing real growth, which will add to domestic inflationary concerns. The Bank won’t want to cut rates, only to have to hike them again. It will therefore want to have a high degree of certainty that it’s got inflation licked before taking action. For the time being that means a plateau in rates until some conclusive data shifts the arithmetic.”
Nick Henshaw, Head of Intermediary Distribution at Wesleyan, said: “Despite today’s decision, it’s likely that rates will start to fall in the months ahead.
“This will be prompting a review of strategies as clients consider whether cash, which some will have recently increased their exposure to, will still deliver the best outcome for them. In some cases, their focus may now turn to other investment options, including equities.
“As always, it will be essential that clients’ investment strategies are suitable for their unique circumstances – something emphasised by the FCA yesterday in its ‘Dear CEO’ letter on retirement income. Some clients increasing or starting equity investment may benefit from looking closely at specialist funds – including ‘smoothed’ funds – that are well-placed to meet specific needs.”
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