After the news last night that the Fed had decided to cut US interest rates for the first time in four years and by more than expected, by 0.5%, all eyes were on the Bank of England today to see if it might continue with further cuts.
However, with the news that the MPC have decided to keep rates on hold at 5% and with an 8/1 unanimous decision, there is still much to assess for Investment Managers and Strategists, especially with the Autumn Statement due next month when we’ll find out the detail of the new Governments fiscal approach.
In the meantime, experts from across the financial services spectrum have been reacting to today’s interest rate news as follows:
Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said: “The Bank of England has held its headline rate at 5%. Given the resilient inflation numbers seen yesterday, as well as core inflation increasing to 3.6%, this is hardly surprising. Unlike the Federal Reserve which delivered a larger than expected 50bps rate cut while overseeing an economy which is humming along nicely, the Bank of England faces different challenges – one of a need to balance growth within the economy vis-à-vis this very persistent inflation. In fact, Andrew Bailey, the chair of the Bank, has already spoken of the “economic costs of bringing down persistent inflation” – lower output and higher unemployment.
“While it is not unfeasible to expect that the trajectory of rates in the UK will follow that of the other Central Banks of the developed world (Japan being the other notable exception), it is the speed of implementation that will be closely watched. All of that creates uncertainty, which translates into volatility in the Gilt market. The onus will be on the Bank of England to manage the path forward and avoid all the policy pitfalls that are par for the course in such a tricky situation.”
Jonny Black, Chief Commercial & Strategy Officer at abrdn adviser, said: “The decision to hold the base rate comes as no surprise, and all eyes are now looking ahead to November for a possible ‘end of the year cut’.
“But the Bank of England won’t pull the trigger until its sure inflation is under control and can fully gauge the impact of Rachel Reeves’ upcoming Autumn Statement, which promises tough sacrifices ahead for the country.
“In such a fast-moving, unpredictable environment, clients will need the expertise of advisers to help them make sense of what the Bank is juggling and to feel confident that their financial strategies will keep working.”
Andy Mielczarek, CEO of Chetwood Financial, said: ““The Bank of England’s decision comes as no surprise and reinforces the sentiment that a period of economic stability is best for Britons. With inflation holding steady, it’s important that the central bank lead by calm and confident example to the public, and it has done precisely that.
“Whilst existing mortgage holders would have liked to have seen a further reduction, they can remain optimistic that the borrowing environment will be less temperamental and that they can make confident longer-term financial decisions. New customers can be hopeful that this period of stability continues, and that a more beneficial mortgage outlook can make their investment decisions more attractive.
“For the time being, savers will be happy the rate has remained the same but could be forgiven for thinking it may be the last chance to maximise returns, especially on fixed-rate savings products. They must remain diligent in searching the market for the best returns before a potential further reduction to the base rate.”
Nick Henshaw, Head of Intermediary Distribution at Wesleyan, said: “Though inflation now appears to be more under control, rate setters are sticking with their cautious approach.
“It means advisers face a tricky balancing act as the case for holding cash continues to weaken.
“Our recent research found almost three quarters (73%) of advisers had already helped all or most of their clients increase their equities exposure ahead of expected interest rate cuts this year, but many clients will be understandably nervous about the elevated risk this presents.
“In this environment, smoothed funds can provide an acceptable middle ground for clients as they re-engage with equities through the transition to lower interest rates.”
George Lagarias, Chief Economist at Forvis Mazars comments: “The Bank of England maintained rates despite a clear “green light” for more aggressive cuts after yesterday’s surprise 0.5% move from the Fed. Unlike its US counterpart, the British central bank is not quick to declare victory against inflation, despite facing significantly more restrictive economic growth conditions. Having said that, we would expect the Bank to pick up the pace in the next few meetings, as both the US and the ECB are on steeper rate cut cycles.”
Joe Pepper, UK Chief Executive Office at PEXA, said: “The decision to hold the base rate is a disappointment for borrowers, but it is not a surprise following yesterday’s inflation figures. We now hold our breath until the next MPC meeting in November, but that decision will also be contingent on the market’s reaction to the Labour government’s first Budget.
“Whether the rate is reduced in November or not, we will see huge spikes in demand in the final two months of the year thanks to the fact that millions of people are coming to the end of their fixed rates. Coupled with a Budget that might well reinforce the government’s focus on addressing the issues in the front end of the property market for the economic benefits it brings, there will be a spike in demand from consumers that will inevitably pile the pressure on conveyancing infrastructure that is already overburdened and simply not equipped to handle it.
“Investing in a digital overhaul of the back-end processes and technology is crucial in addressing this. This necessitates private investment primarily but making it effective nationwide needs strong support from government too. Cross-sector commitment and collaboration to achieve modernisation is vital, and it can’t come soon enough.”
Ed Monk, associate director for personal investing at Fidelity International, said: “The 8-1 MPC vote to hold rates is a surprise given recent economic data has shown growth slowing. That created some expectation that rates could be cut this month but the strength of the vote to hold them perhaps suggests that the Bank sees a period of below-potential growth as being necessary to get the last bit of high inflation under control. It means borrowers will have to be patient in their wait for rates to fall, even if that is now the direction of travel.
“Expectations for where rates will land have been moving lower as the year has progressed. Market prices ahead of the announcement suggested rates will dip below 4% within 18 months. With inflation sticking slightly ahead of target and expected to rise again this year before settling, real returns from cash are likely to be lower than has been the case over the past two years.
“That makes now a good time for investors to reassess their balance of cash versus investments. The two do different jobs in your financial mix and it makes sense to hold both, however many will have jumped on the high returns available recently from cash and shifted assets away from investments. That plan has largely worked in the past two years as inflation-adjusted returns from cash have been strong, although still lagging the stock market in that time. Over longer periods, however, investing in assets like shares and bonds has a better record of producing inflation-beating returns than cash. “
Derek Sprawling, Paragon Bank Managing Director of Savings, comments: “Although the MPC kept rates on hold today, the market expects Base Rate to fall further and that will inevitably impact savings rates. In this environment, it is sensible for savers to consider locking in attractive fixed-rate deals at today’s prices as it is expected they will be lower in the coming months.”
Rob Hudson, Head of International Banking and Payments at FIS, said: “The latest news that interest rates are staying at 5% comes as little surprise, considering yesterday’s news from the ONS that inflation has persisted at 2.2%. However, this doesn’t make it any easier for Brits to accept.
“We’re fast approaching winter, a period where consumers are typically more reliant on savings to afford Christmas celebrations and the longer pay gap between December and January. However, with 35% of Brits reporting that they have less than £500 in savings, the recent Bank of England announcement may have consumers making the difficult decision to downsize celebrations this year to avoid high-interest loans.
“Despite this, financial anxiety may not actually spike this winter as would be expected. 48% of Brits are embracing ‘loud budgeting’, the act of publicly living within their means, showing that discussing one’s finances is no longer considered taboo. This new-found openness is ensuring that people are continually aware of their finances and, therefore, putting their money to work as best as possible.”
Andrew Gething, managing director of MorganAsh, said: “Despite cuts from the ECB and a large cut from the Federal Reserve last night, the Bank of England has decided not to follow suit and instead to hold its position. In reality, this was widely expected, following its first cut last month and the staggered, cautious approach the central bank has planned to maintain when it comes to interest rates.
“The positive we have to take is that we are on the path of interest-rate cuts. The question becomes how long this process will take and where we will eventually land. This is especially pertinent for those on tracker- or variable-rate mortgages who feel the benefit of a cut almost immediately. While last month’s cut will have helped ease some of the financial pressures on households and the affordability challenges facing new borrowers, this burden on households remains very high. At least the consensus remains that a cut is expected in November.
“Across financial services, the focus on vulnerable customers remains incredibly important, with the regulator taking action on firms who cannot identify this cohort of customers or ensure good outcomes. With a continued stretch on household budgets having a clear impact on health and wellbeing, and on living standards, it’s all too easy for more customers to be pushed into a vulnerable position. Even as rates improve, our awareness of vulnerable customers and our ability to assess, identify and provide support remains a constant priority.”
Richard Pike, chief sales and marketing officer at Phoebus, said: “With economic growth in the UK treading water and inflation likely to increase again towards the end of the year, this Committee decision is unsurprising. Markets were predicting a one-in-five chance of a Bank Rate cut, so today’s decision falls in line with this and won’t cause major changes in product pricing.
“That said, many lenders have been holding back dropping fixed rates for as long as they could, so we can still expect more competitive pricing. I expect we’ll see a different picture in November, when Markets are predicting a 0.25% reduction in Base Rate”.
Rob Morgan, Chief Investment Analyst at Charles Stanley said: “Price rises rarely subside in a straight line, so the reacceleration in CPI inflation to above the Bank of England’s 2% target in July and August hasn’t caused significant angst among policymakers. Indeed, price rises are trending below the BoE’s own previous forecast.
“Yet the latest picture also didn’t compel a balance of MPC members to vote for a cut today either. The strength of core inflation remains a concern, and services inflation is still too elevated to justify acting again so soon after August’s reduction. Instead, a move in November seems odds on. By this stage the data may show a further moderation in wage pressures which feed into services inflation, plus any ramifications from the Budget on October 30th can be considered. A particularly fiscally tight Budget may tip the scales towards a more rapid loosening of monetary policy from that point.
“The US Federal Reserve taking a hatchet to interest rates, slashing by 0.5% instead of a more expected 0.25%, further served to cloud the picture ahead of today’s vote. However, The BoE is in a different place to the Fed. Across the Atlantic inflation has more decidedly fallen back to target. Meanwhile, the UK is still suffering from the effects of an unusually tight labour market and resulting wage pressures. There is simply less comfort that price pressures will concertedly subside. Businesses and households hoping for further reprieve from higher interest rates will therefore have to wait a little longer. A series of cuts are pencilled in by forecasters over the next year, and if all goes to plan on the inflation front a gentle trajectory back down to the 4% level by mid-2025 should help improve consumer confidence and boost the economy.
“However, this more benign scenario should not be taken for granted. The inflation outlook is clouded by several factors: a strong jobs market keeping wages buoyant and services costs high, a more fractious geopolitical backdrop and the lingering impact of reconfigured supply chains. Interest rates will level out much higher than pre-pandemic, and there remains risk to the upside.”
Lindsay James, investment strategist at Quilter Investors: “Despite the supersized rate cut in the US yesterday and cuts continuing to be enacted in Europe, the Bank of England has decided to hold rates following its first cut in four years last month. However, while today may be a pause, the general consensus is to expect more rate cuts this year and into next as the economic momentum that had built up slows and inflation remains close to target. Two more cuts are expected by financial markets, and with time running out in 2024, the next meeting is likely to see the BoE’s next cut delivered.
“The spectre hanging over all of this, however, is the upcoming Autumn Budget at the end of October. Taxes are guaranteed to rise, but by what extent we are not sure and thus the economic impact cannot be properly gauged. Businesses and consumers are likely to cut back on spending in anticipation of changes to their income and as such growth could slide further. Given Labour’s emphasis on wealth creation and economic growth in the run up to the election, it may in turn, have to rely on the Bank of England to deliver this in the short term by providing more regular or larger rate cuts than perhaps would have been expected otherwise.
“A rate cut would have been especially welcomed by consumers and businesses alike, given the economy remains close to stall speed. Having had a positive and rather buoyant first half of 2024, dark clouds are gathering once again and as such action from the BoE will be required sooner rather than later.”
