UK interest rate remains at 5.25% for third consecutive month: the industry reacts

by | Dec 14, 2023

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As was widely anticipated, at their meeting earlier today, the Bank of England’s Monetary Policy Committee (MPC) has decided to hold UK base rates at the current level of 5.25% for the third consecutive month.

After 14 successive interest rate hikes, this welcome hiatus has provoked a positive response from across the financial services spectrum, as advisers, investment managers, mortgage brokers and many others have been considering what the latest news means for clients, for business and for asset allocation and stock selection strategies into 2024.

All eyes are now focused on how quickly we might start to see interest rates reduce in 2024 , given the economic data which has shown that the economy is slowing down in response to higher rates. The market is now expecting there to be hefty UK (and US) interest rate cuts next year as a result, which, given the ongoing cost of living crisis and risk of recession still looming, will be eagerly anticipated.

Commenting on today’s Bank of England decision to hold the interest rate at 5.25%, experts from across the industry have been sharing their reaction to the news with IFA Magazine as follows:

 
 

Jatin Ondhia, CEO of Shojin, said: “The Bank of England is walking a tightrope. Understandably, it is unwilling to loosen its grip on inflation by dropping rates any time soon. But it also has to be careful not to inflict excessive damage on the UK’s contracting economy. It’s an unenvious task, but we should welcome the fact that the base rate is likely to hold at 5.25% in the short-to-medium-term – it means people can finally make financial plans with a degree of certainty, and the timing couldn’t be better.

The New Year always brings about a renewed focus on finances as people set their investing, saving and spending goals. Higher interest rates are likely to lead more people towards the wide array of ISA products available, but diversification will be another key trend to watch in 2024, with real estate a perennially popular asset. Diversifying one’s savings and investments can help hedge against economic volatility, and as the Bank of England continues along the tightrope, preparing for potential volatility next year will be on many people’s agenda over the coming months.”

Laura Suter, director of personal finance at AJ Bell, comments:

 

“The Bank of England has held interest rates for the third time, with six ratesetters voting to hold them at 5.25%, while three wanted to push rates up to 5.5%. It means Base Rate remains at its 15-year high and we have a reprieve from any further moves in the rate until February, when the MPC next meet.

You could get whiplash from how quickly markets have moved from predicting the timing and size of the next interest rate hike to talking about sizeable rate cuts. Despite protests from many at the Bank of England that rate cuts aren’t on the agenda just yet, markets are now pricing in a full percentage point cut to interest rates by the end of next year. What’s more, the markets are betting on the Bank taking the axe to rates from as early as May next year, rather than the previous expected timing of Autumn. 

All this is good news for mortgage holders and less favourable news for savers. And despite the Bank taking no action today, it’s time for anyone with a mortgage or savings to take some action if they haven’t got their financial ducks in a row yet.”

 

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “We have entered a period of stability where interest rates are concerned, but there is no room for complacency as people consider their financial plans for 2024.

For the first time in 15 years, the base rate is residing above inflation, and savers must consider how they can take advantage of this shift. Crucially, we must remember that a higher base rate is not a guarantee of greater returns on saving pots, with many banks and many savings products – easy-access accounts in particular – still offering returns that do not even match the 5.25% base rate, let alone better it.

Lily Megson, Policy Director at My Pension Expert said: “The Bank of England’s cautious stance is unlikely to feel like Christmas-come-early for Britons. Holding the base rate might provide some respite after a great deal of turbulence, but it will do little to restore consumer confidence.

 

Those in or near retirement have been some of the hardest hit by the cost of living. Thousands have returned to work or are delaying their retirement to top up savings that have withered away in real terms due to sky-high inflation. The question is how they can now benefit from a higher, stable base rate, particularly as inflation has fallen.

It is a delicate balancing act. Pension planners must consider how to effectively prepare financially for retirement – and this will involve considering an array of options, from annuities to flexible access drawdowns. But no one has to make these decisions alone. More should be done by the government to highlight the value of independent financial advice, which can help people make informed decisions based on their own needs and circumstances – and more importantly, help people understand where they can access it. “

Mohsin Rashid, CEO of ZIPZERO, said: “Pockets across the country remain pinched. Holding the base rate steady will certainly save many Britons from another punch to the gut, but it won’t repair the damage of the many blows that have come before. With their financial wellbeing eroded by years of fiscal chaos, much more must be done to support those still struggling under the twin burdens of high interest rates and high inflation. Whether it means relief packages from the Government or retailers doing more to keep prices fair and manageable – ideally a mixture of both – what matters most is that it happens

 

Commenting on the interest rate hold from the Bank of England, William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says:

“Since the last Bank of England meeting there has been great progress with the inflation rate – it fell by 2.1% in October. The Monetary Policy Committee would have been especially pleased with the drop in the more domestically focused inflation metrics like services inflation and core CPI. This data all but confirmed that August’s 0.25% rate hike would be the last.

Investor focus has therefore moved toward interpreting any guidance from the MPC as to when the first interest rate cuts can be expected next year. Here, the MPC will try to reign in the market. Any overblown expectations of several rate cuts next year will likely weaken the pound and could once again exacerbate the inflation problem. Latest Consensus Forecasts doesn’t have the inflation rate falling below 3% until next April and the Bank of England’s own projections don’t expect them to meet their 2% target until 2025. Labour market pressures are only easing slowly so for this and other reasons the Bank of England will likely be behind both the Federal Reserve and European Central Bank in cutting rates next year.”

 

Jonny Black, Chief Commercial & Strategy Officer, abrdn adviser said: “The Bank of England has been clear that it doesn’t plan to drop interest rates until the risk of inflation resurging has passed. Today’s ‘hold’ decision shows that it feels now is still too soon to do this. 

It’s not clear when rate reductions will come – new forecasts released earlier this week suggest it could not be until 2026. Clients will value reassurance that their savings and investment strategies are adapted to deliver good outcomes for them given under current conditions, and that their advisers are on hand to help them make changes to their strategies should circumstances change quickly in the future.”

LCP Investment Partner Paul Gibney commented:

“A big question for 2024 will be if and when the Bank feels able to start cutting rates.  Clearly, while inflation remains on a downward trajectory, MPC members believe more evidence of economic softening is needed before any monetary easing is warranted.  Wednesday’s surprise announcement that the UK economy had contracted in October was not enough to tip the balance in favour of lower rates.

While the slowdown may have brought forward the timing of rate cuts, market expectations remain that the Bank of England will cut rates later and more slowly than other major developed market central banks, given the more persistent pricing pressures that the UK economy faces.   Exactly when that process starts has no doubt been further complicated by the US Fed’s indication in its post-meeting conference yesterday that it is likely to start cutting rates next year sooner than had previously seemed likely.“

Rachel Winter, Partner and Investment Manager at Killik & Co, said

“As was the consensus expectation among commentators, the Bank of England has decided to keep the base rate stable at 5.25% for the third consecutive month. This follows on from yesterday’s announcement that the Federal Reserve will also be keeping rates on hold this month. The news that we have likely reached the peak of the interest cycle will be taken as a positive sign by investors and consumers, who have been grappling with volatile markets and high borrowing costs for much of the last two years.

Interest rates on both sides of the pond are now expected to fall in 2024, and investors should start to think about how to best capitalise on this. Falling interest rate environments have historically been good news for both equities and bonds. More generally, a new year is a great time to review investment portfolios and make sure they have exposure to promising themes such as artificial intelligence and energy efficiency.”

Andrew Gething, managing director of MorganAsh, said: “News of another hold on interest rates marks a stable end to an intense year for borrowing. Despite the Bank of England’s own view that this may be the outcome for a much longer period, markets seem buoyed by the long-term outlook for interest rates and the wider economy being far more stable. Economists are even suggesting that markets are pricing in cuts next year with forecast rates edging towards to 4% by the end of 2024. We’re certainly seeing this positivity in mortgages rates, which continue to improve and become more competitive, which is positive for borrowers.

Of course, this doesn’t mean it’s all plain sailing from here, with many homeowners and consumers set to feel considerable pressure in the coming year. That is especially true for the more than a million homeowners set to remortgage in 2024 onto an improving, but much higher rate than they are used to. With the FCA’s own data suggesting that half of all UK adults are vulnerable, there’s every chance that firms could see a growing proportion of vulnerability among their customer base.

Consumer Duty is an ongoing priority for the regulator, particularly the treatment of vulnerable consumers. In its latest Regulatory Initiatives Grid and in recent comms, the FCA announced it will be assessing firms progress on vulnerability in Q1 2024. This should sound alarm bells to those firms still reporting few or even zero vulnerable customers, which is a clear concern. In reality, this is a sign of poor-quality data and a lack of a consistent approach to assessing and monitoring vulnerable consumers. With the regulator hot on non-compliance, this has to be a priority for all firms. After all, how can firms identify clients in difficulty if they haven’t fully evaluated their customer base.”

Commenting on the BoE’s decision to hold rates Hetal Mehta, head of economic research at St. James’s Place, said: “The Bank of England’s decision today to maintain a hawkish message sets it markedly apart from the Fed. Underlying inflation is still uncomfortably high and the recent pricing of multiple rate cuts from early next year was clearly an easing of financial conditions that the BoE felt the need to push back against. The fall in wage inflation so far is not enough to be consistent with the 2% inflation target.”

Commenting on interest rates remaining fixed and investors needing to adapt to a period of prolonged higher interest rates, John Glencross, CEO and Co-Founder of Calculus, said: “The Bank of England has once again passed on the opportunity to lower the current 5.25% bank rate. This indicates that the Monetary Policy Committee still believes that inflation is delicately poised and a premature lowering of interest rates could unwind some hard-fought progress. UK inflation figures remain worse than the US and Euro-area and the narrative from the BofE indicates interest rates will remain higher for an extended period of time. Adapting to a period of prolonged higher interest rates is key for investors. For small early stage businesses, accessible through the EIS and VCT investment schemes, delivering on business plans will have a far greater impact on their valuation than the change in the interest rate environment.”

Hugh Gimber, global market strategist at J.P. Morgan Asset Management:

“Christmas came early for risk assets yesterday with the Fed’s dovish turn. Unfortunately for the Bank of England, economic data in the UK means that policymakers simply aren’t able to be as generous. With wage growth still above 7% and headline inflation north of 4%, it’s too early for the Bank to declare victory in its battle against inflation.’

Markets have been increasingly keen to bring forward the timing of UK rate cuts over recent weeks, but this appears to have been driven much more by changes in expectations for the Fed and the ECB rather than anything in the domestic data that would justify such a move. We do expect the Bank to lower interest rates in 2024, but only once there are clearer signs of the labour market loosening.’

For UK savers, current cash rates may look tempting. Yet with interest rates likely to fall, sitting in cash today entails significant reinvestment risk looking a year ahead. We therefore believe that this is a good opportunity to lock in the yields available on core government bonds, which should outperform cash if the economy weakens further in 2024.”

Sarwar Khawaja, Chairman, Executive Board, Oxford Business College, commented:

“The Bank’s surprisingly tough line risks sounding more discordant than determined.

With the UK economy officially shrinking in October and both consumer spending and business investment falling, the painful side effects of the Bank’s bitter monetary medicine are spreading.“So while no-one expected the Bank to cut interest rates today, many businesses had at least hoped for some clues that rates would start to ease off next year.

But the minutes of the Bank’s rate-setting Monetary Policy Committee offered not one crumb of comfort. Not only did three committee members vote for another rate rise this week, there wasn’t even a hint of the tone softening in 2024.

As far as the Bank of England is concerned, the fight against inflation is still raging and it reserves the right to push rates even higher. But there’s mounting evidence that many businesses and homeowners are becoming collateral damage in the struggle.”

Commenting on today’s rate decision from the Bank of England, Melanie Baker, senior economist at Royal London Asset Management, said: 

“The Bank of England’s Monetary Policy Committee (MPC) again flagged that the decision to hold or hike was ‘finely balanced’. The minutes do not mention that there was any discussion of rate cuts, though it sounds as if one MPC member might have been close to voting for a cut: ‘For one member, the risks of overtightening policy had continued to build’.  

The MPC doesn’t have a press conference in December and doesn’t publish its own rate forecasts. Still, the overall tone was quite a contrast to the relatively dovish-sounding Federal Reserve last night. 

The committee continues to judge that risks to their inflation forecasts are on the upside and although there were definite dovish elements to some of the economic commentary, they still see it as too early to conclude that services inflation and pay growth are on a firm downward path. 

Overall, there wasn’t much change in tone from the Bank of England today, but the February Report will be accompanied by their annual “stocktake” of supply capacity so would probably be the more likely time to expect a bit of a shift in tone.” 

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