UK interest rates held at 5.25%| But why? Reaction from across the industry

bank of england

It’s no surprise to IFA Magazine readers that, yet again this month, the Bank of England’s Monetary Policy Committee (MPC) has decided to keep UK interest rates at their current level of 5.25%, for the seventh time in a row. The MPC voted 7/2 in favour of holding.

That’s largely down to yesterday’s UK inflation data. There had been a few question marks for advisers, mortgage brokers and paraplanners around the timing of possible interest rate cuts. However, despite the good news that headline inflation had hit the Bank’s 2% target for the first time in almost three years, services inflation is proving to be the fly in the ointment. Coming in at 5.7% for the year to April, this is going to cause some concern amongst policy makers. Why? It just means that they can’t cut interest rates too quickly in case they inflame the situation and cause more long term inflationary pressures taking hold in the economy. Focus now shifts to the Bank’s next meeting in August but in the meantime the cost of living crisis continues to hit consumers and business budgets hard. The devil will be in the detail of the minutes of course.

So what does today’s interest rate announcement and the latest inflation data actually mean for advisers and their clients? Decisions around asset allocation, clients’ investment portfolios and of course for mortgages and the property market, are all affected. Experts from across the industry having been sharing their views with us as follows:

Karen Barrett, CEO and Founder of Unbiased said: “Today’s result is certainly a blow for households, but the Bank of England is rightly steering clear of the risk of reigniting inflation, especially with the UK having just hit the 2% target. As we approach the General Election, there is huge political sensitivity surrounding interest rate calls, and it’s essential the BoE maintains its resolve in the face of this.

“For all the talk of ‘Swiftonomics’ that stole headlines this month, the fact is the UK economy is still in a period of financial uncertainty. The BoE must continue to respond in kind and focus solely on doing what is genuinely best for the economy; irrespective of electoral campaigns.


Nick Henshaw, Head of Intermediary Distribution at Wesleyan, said

“Despite the fact that inflation is now moving in the right direction, the MPC has pressed pause on any potential cuts – for now.

Still, it’s a clearly a case of when, not if, rates will fall, with markets now looking at late summer or early autumn.


Any rate cut will have implications for clients’ plans, but our research has found that advisers are ahead of the game. Nearly three quarters – 73% – have already helped all or most of their clients increase their equities exposure in anticipation of a rate cut.

Some clients will be concerned about increasing their equities holdings, but advisers have access to a range of solutions that can help their clients manage the transition to a lower interest rate environment. Smoothed funds, for example, can provide a middle ground for clients as they continue to reduce their cash allocation by reducing volatility and helping to moderate risk.”

Laura Suter, director of personal finance at AJ Bellcomments on the latest Bank of England interest rates decision:


“The chances of a rate cut were already very slim, but market hopes fell even further after yesterday’s inflation figures. Much of the public might have expected that once we hit the coveted 2% target for inflation the Bank would immediately start cutting rates. Sadly, that’s not the case. Sticky core inflation and higher services inflation all helped to play into the Bank’s decision not to cut rates.

On top of that, the Bank has taken a vow of silence during the general election campaign – meaning that if it did cut interest rates it wouldn’t have been able to explain the decision. We know from previous Base Rate moves that the comments the Bank makes are almost as significant as the interest rate move itself. Without the ability to explain the thinking behind the decision and the future path for rates, it made sense for the bank to hold. The split in the vote was the same as last month, with seven preferring to stick and two voting to cut rates by 0.25 percentage points.

The other elephant in the room is the outcome of the general election. Whoever makes it into Number 10 will be changing policy, taxes and the fortunes of the UK economy, all of which play into the economic data the Bank scrutinises every month. The MPC will likely want to examine any plans and the impact on inflation and other data before it makes the move to cut rates. If they are victorious, Labour have pledged an economic update in September – which casts some doubt on an August interest rate cut, as the Bank may decide to wait and see the outcome of that update before getting its axe out to cut rates.”


All of this is pretty frustrating for the general public, who may see politics getting in the way of interest rates being chopped. Every month that rates stay higher we see more people come off their cheap mortgage deals and onto far more expensive rates. While a small, quarter of a percentage point cut to rates isn’t going to have a dramatic effect on mortgage-holders’ monthly payments, it would be a step in the right direction for people looking down the barrel of paying hundreds more each month for their mortgage.”

Helen Vieira, Head of Banks at Flagstone International comments on the MPC’s base rate decision: 

“The decision by the UK Monetary Policy Committee (MPC) to hold base rate at 5.25% shows the Bank of England intends to hold steady on its fiscal course for now, despite yesterday’s CPI data revealing that the rate of UK inflation has finally descended to the Bank of England’s 2% target.


The policymakers on the MPC are not confident enough that the inflation genie is back in the bottle and so they intend to maintain the fiscal pressure they have been applying on the UK economy since December 2021 for a little while longer. Clearly, they need more reassurance from CPI data before they start to release their grip.

Even so, expectations are that a cut is just around the corner. Canada and the ECB have already cut their rates in an effort to stimulate economic growth and the UK, along with the remaining G7 economies, will need to follow suit shortly.  The question now is how deep will those cuts go?

As seen in Flagstone’s most recent UK base rate poll over three quarters (77%) of senior savings professionals expect UK base rate will be in or around 4.5% by the end of 2024 and there is a general sense that rates will descend further as we move into 2025.


With that in mind, those managing cash deposits internationally will see rates offered on cash start to tick down across many jurisdictions. That makes it even more important to stay informed and ready to take advantage of the best returns as rates reset.”

Lily Megson, Policy Director at My Pension Expert, said:

“Could today’s hold be the last? It seems likely. Inflation is finally back at target levels after three long years, and the next time the Bank of England meets to decide on interest rates, the dust will have settled on the general election. Certainly, come 1st August, the Bank will be under intense pressure to start bringing interest rates down and ease the burden on Britons’ finances.


But before that happens, savers would be wise to consider how peak interest rates could benefit them in achieving their financial goals. For retirement planners, for instance, locking in favourable rates on fixed-term products like annuities and bonds could give their savings a welcome boost. Ultimately, as we prepare for interest rates to fall in the second half of 2024, it would be prudent for those looking to fully understand how economic policy impacts their finances to seek independent financial advice.”

Lindsay James, investment strategist at Quilter Investors comments:

“Though inflation hitting 2% marked a significant milestone, it is simply not enough to allow the Bank of England to declare job done. Instead, the monetary policy committee has opted to leave interest rates unchanged once more.


While it will come as a bitter blow to the Conservative party, this decision is no real surprise given month-on-month figures suggest inflation is unlikely to remain at 2% for long. It is instead expected to rise again later this year and ultimately settle between 2% and 3%. The Bank will be keeping a keen eye on wage growth, which remains around 6%, as well as services inflation which has been taking its time in coming down and has continued to feed into elevated core inflation. With the Labour Force Participation Rate still trending down and at the lowest level since 2015, a worker shortage is one crucial inflationary factor that will need addressing by the incoming government. Given the Bank’s focus on sustainably returning inflation to the target in the medium term, it could be some time yet before we see a cut.

Until recently, markets had been pricing in several BoE rate cuts this year, with the first previously expected in the summer. Given the hesitation around inflation, it is looking increasingly likely that the first cut will not materialise until November which means we could see just one or two cuts from the BoE this year after all. This would put the BoE roughly in alignment with the Federal Reserve, which now expects to make just one rate cut this year, and trailing behind the European Central Bank which has already fired the starting gun.

Though the headline rate of inflation has lowered, various areas of the economy are still seeing prices rising at a faster rate than the 2% target. What’s more, the high cost of living is still biting, meaning households are unlikely to be feeling any better off. With interest rates unlikely to fall for some time yet, and the prospect of lower rates later in the year so far having little impact on mortgage rates and long-term debt agreements, consumers and businesses will continue to carry the burden.”


Derrick Dunne, CEO of YOU Asset Management, comments on today’s MPC decision to hold interest rates:

“The MPC’s decision not to cut the base rate this lunchtime, while frustrating for households, is entirely expected. The news yesterday that the headline rate of inflation hit target didn’t outweigh the fact that core inflation is still sitting well above target nor that the job market has yet to cool to a level that affords sufficient comfort for the rate-setters.

It’ll be few months yet before we’re likely to see rates start to come down. So, for now at least, the champagne can go back in the fridge. We can be cautiously optimistic that we’ve turned a corner, but we’re not out of the woods yet.

Anyone concerned about how the continuing high interest rate environment might impact the holdings in their portfolio should speak to their financial adviser.”

Andrew Gething, managing director of MorganAsh, said

“Even with inflation finally reaching its 2% target, today’s decision was still widely expected. Not only was the central bank always unlikely to pull the trigger straight away when inflation hit target, but making such a big call in the middle of an election campaign would have surely weighed heavily on its decision. 

While not the news many would have hoped for, that continuity and stability on base rate will certainly help those not on a fixed rate, although the financial burden does remain painfully high for many families. A cut to base rate today would have just brought a welcome reprieve, but at least we are still talking about ‘when’ rather than ‘if’. 

The FCA’s own data points to as much as half of all UK adults being vulnerable in some way. Sustained financial pressures will only increase the proportion of vulnerable customers each firm has and with Consumer Duty in force, it is up to each and every firm to identify who these customers are and provide the necessary support. Not only is this impossible without good data, but it makes it incredibly hard to meet the regulator’s reporting requirements due next month. 

For the sake of those customers in vulnerable circumstances, we do have hope that a base rate cut comes sooner rather than later.”

George Lagarias, Chief Economist at Mazars, comments:

“It comes as no surprise that the Bank has maintained interest rates. Despite inflation reaching the 2% target, Bank officials acknowledge that some data, possibly services inflation, remain too high for comfort. We believe it is still very likely that the UK will begin rate cuts this year. But it will take a decisive plunge in wage inflation to turn sparse cuts into a persistent rate cut cycle.”

Ed Monk, associate director for personal investing at Fidelity International, said: 

“The ongoing General Election campaign had already handed the Bank of England a reason not to move on rates this month but even without that a cut was unlikely. Once again just two MPC members voted to cut.

Wages continue to rise strongly at around 6%, adding to inflationary pressure, even if the Bank has reported some loosening of the labour market. Prices for services are also still running hot. It’s likely that rate-setters at the Bank will focus on that rather than the headline inflation numbers which is – for now at least – back on target.

It all means the pain for borrowers goes on. With inflation back to 2% there will be increasing pressure on the Bank of England to justify the continuation of high rates. For savers, now represents a rare opportunity to achieve returns on their money which beat inflation by a clear margin. It should be remembered also that risk-assets such as shares can also benefit during such periods and have a history of generating inflation-beating returns that outpace cash.”

Tim Graf, Head of EMEA Macro Strategy at State Street Global Markets, reacts to today’s BoE interest rate decision:

“There were no surprises from the result or the vote, but today’s Bank of England decision and accompanying commentary are meaningful in bringing an August cut more into frame. Noting that the decision to cut rates was ‘finely balanced’ for some voters implies at least a handful of MPC members are close to changing their vote to a cut. Given the weakness emerging in the labour market, the June CPI data, released 17 July, and payroll data, released the following day, likely determine whether that first cut comes in August or September.”

Guy Foster, chief strategist at wealth manager, RBC Brewin Dolphin said:

“It was no surprise that the Bank of England left interest rates on hold. The MPC continue to believe that the economy will weaken creating spare capacity, which is an economist’s euphemism for unemployment.

The anticipated weakening of the economy means the Bank of England is comfortable allowing markets to expect interest rate cuts. Two members would like to cut interest rates but the rest of the committee need to see economic data to confirm their suspicions that the economy is weakening.

Problems with data make it difficult to be confident that the labour market is loosening, and although the inflation rate has slowed there are reasons to doubt whether that decline will endure. Much about inflation is beyond the influence of interest rate setters, but the critical measure of services prices continues to rise too fast for now. The MPS expect this to slow and until it does, interest rates are unlikely to coming down.

In practice interest rates faced by households have been rising in recent months because most mortgage rates reflect expectations of future interest rates rather than the rate announced at each meeting by the Bank of England. As the prospect of interest rate cuts has slowly ebbed away, the effect has been higher interest rates for those buying or remortgaging a property.”

Michael Browne, CIO at Martin Currie, part of Franklin Templeton, comments on today’s Bank of England interest rate decision:

“The MPC has disappointed earlier expectations by not starting the rate cutting period today. The UK economy is performing better than expected but not enough to justify restrictive rates. Rate cuts will start in the second half of the year and are likely to continue over a long period of time, as the MPC moves cautiously. If the UK enters a period of political certainty after the election with higher for longer rates (and a less stable backdrop in Europe), there will be upside risks to UK Sterling. These factors combined would be helpful to lower inflation.

Looking ahead, the Bank of England (BoE) has clearly hinted at a rate cut in August which is now being fully priced in by markets.

After the most recent set of inflation data, all point to the service sector as the culprit. Wages, merely recouping last year’s real income losses, are remaining high and prices are rising in the wage driven service sector. But things are not what they seem here either: the largest sector in services is recreational where inflation is 6.4% , catering at 5.4%. Housing, a need rather than a discretionary spend is rising at 6.9% and the important rentals sector 7%. However, the food sector is the key for setting inflationary expectations and inflation here is at 3.3%.

The Bank’s decision seems to be driven by highly seasonal factors such as holidays and catering, rather than longer term items. This follows recent comments from Ryanair that expectations for travel pricing in the second half of the year are weak.

The BoE is aligning with the US Central bank in not cutting during the June meetings. This reflects that UK growth has consistently surprised to the upside, whilst Europe has been slow to recover. 

Separately, the Swiss Central Bank has cut rates by 25 bps today. A surprise cut on the strength of the Swiss CHF post French election fears.”

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