Rates Held at 5.25% as Bank of England Remains Mr Cautious

Following a meeting of the Monetary Policy Committee yesterday, the Bank keeps rates where they are, in line with market expectations

Ollie Smith 21 March, 2024 | 12:05AM
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In a move widely anticipated by markets, the Bank of England's Monetary Policy Committee has voted by a majority of eight to one to hold interest rates at 5.25%.

Despite data earlier this week showing the UK's consumer price index (CPI) was falling in February, the Bank still opted to hold rates, arguing that risks in the economy remained.

"Headline CPI inflation has continued to fall back relatively sharply in part owing to base effects and external effects from energy and goods prices," the Bank said today.

"The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Nonetheless, key indicators of inflation persistence remain elevated.

"Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates." 

What do The Experts Say About a Rate Hold?

Michael Field, European market strategist, Morningstar:

"Today’s announcement [...] was well anticipated. What investors were hoping for, however, was the Bank might take a leaf out of the Federal Reserve's playbook, with the Fed only yesterday indicating it will cut rates by 0.75% this year, while allowing inflation to run slightly.

"The Bank has made no such promises, but interest rates in the UK sit at 5.25%, the highest level among developed countries. This gives the Bank significant room for maneuver when it comes to cuts this year. Voting patterns amongst the committee are slowly shifting in the direction of cuts, also. Last time around, two of the nine members of the MPC voted to increase rates, this time none did.

"Inflation in the UK at 3.4% remains materially above the Bank's targeted 2% level, but it's the trajectory of inflation that is most important, and this should give the Bank some comfort. Whether the first interest rate cut comes in June, as largely anticipated for the Fed and the ECB, or later in the third quarter, remains to be seen."

Henk Potts, Market Strategist at Barclays Private Bank

"The Bank of England [was] expected to keep rates at 5.25% for a fifth consecutive meeting on Thursday and maintain the current cautious guidance.

"However, recent data and economic projections have supported the case for interest rate cuts. Inflation has moderated and labour markets are finally starting to ease. Headline CPI is expected to fall below the central bank's 2% target level later in the year, with unemployment climbing to 4.5% in the final quarter.

"The MPC is likely to be laser-focused on the incoming inflation prints, labour market reports and growth figures for the first quarter. These could pave the way for a pivot to an easing stance by the May meeting, with the first 25bp rate cut pencilled in for June. With more to follow, we anticipate that the Bank Rate will finish the year at 4%."

Lily Megson, policy directo, My Pension Expert

"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."

Andy Mielczarek, chief executive, SmartSave

"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."

How Would a Future Interest Rate Cut Affect Me? 

As the above comments suggest, analysts and comments expect rate cuts this year. So what does that mean for consumers, and, crucially, those with savings and investments?

As interest rates decrease, cash savings rates on bank accounts and ISAs will likely decrease, meaning savers may start getting less bang for their buck at the bank.

However, lower rates will also make consumer debt cheaper, which could bring relief to people with substantial credit card debt – and mortgage holders with variable-rate products. Those who have remortgaged into fixed-rate products in the last two years may not feel this until they remortgage once more.

What Will Equities and Bonds do if Rates Are Cut?

Markets tend to "price in" any changes very quickly, so the reaction to this kind of news will be swift. Conventional wisdom suggests rate cuts are better for equities than bonds. But while bonds have returned to favour in the higher interest rate era because of their tempting yields, rate cuts may not be bad for them either.

Falling interest rates mean lower yields, which push bond prices ever higher – a key factor in total returns. And lower rates make existing bonds, and particularly those already issued during a period of rate hikes, more attractive for yield.

In addition, many pension funds, for whom rising bond yields have caused havoc, could also stand to benefit from a looser monetary approach. This may well benefit the government’s attempts to reignite the UK’s stagnant economy as (in theory) it encourages institutional investors to plough money into promising growth businesses.

How Will The Real Economy React?

Over in the "real economy", the unwinding of monetary policy will likely also benefit shops and online businesses who have been squeezed by the twin spectres of supply chain inflation and lower consumer confidence. If higher interest rates have the power to curb spending in the UK economy and cool gross domestic product growth, lower rates will in theory create the opposite effect.

In practice, however, there is a lot of uncertainty. While lower interest rates tend to stimulate the economy, the UK is still expected to suffer from low growth in the coming years wherever rates end up. Either way, it will take time for the precise effects to be visible, let alone quantifiable.

Read more: Bonds Are Attractive: Morningstar’s Outlook for 2024

Read more: What is a Bond?

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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