Bank of England holds rates at 4%: Don’t expect rate cuts soon, warn experts

Source: Trustnet

The Bank of England decided to leave interest rates unchanged at 4% following the latest meeting of its Monetary Policy Committee (MPC).

A seven-to-two majority chose to leave rates steady, while the two dissenting voices proposed a further 25 basis point cut, following on from August's reduction.

George Brown, senior economist at Schroders, said with inflation rising there was “no question” the Bank would hold today, while Brad Holland, director of investment strategy at Nutmeg, said another rate cut was “always a non-starter” as inflation continues to track well above the 2% target.

Indeed, the consumer prices index (CPI) remains stubborn at 3.8%, with wage growth at 4.7% expected to keep prices high.

However, policymakers are walking a tightrope, as concerns over the economy and the health of the jobs market means there is some pressure for the UK central bank to act.

Highlighting this, Lloyd Harris, head of fixed income at Premier Miton Investors, said: “The UK is now the most stagflationary economy in the developed world. A brutal mix of high inflation, weak growth and rising unemployment. This is the kind of environment where central bankers earn their stripes.”

For the Bank to cut again, above-target inflation, which remains a massive headache for the UK economy, will need to come down substantially, particularly the closely-watched core inflation and services. So far these have only shown “modest signs of deceleration”, he said.

Expectations now are that the Bank will remain static until at least the end of the year, with some suggesting it will be at least April before it can cut again.

Felix Feather, economist at Aberdeen, expects the Bank make further cuts in response to labour market softness once a quarter, but said there is a “growing” risk that the next cut will be delayed beyond November.

Others were even more pessimistic. Brown said he is “doubtful” that there will be any rate cuts in 2025 or 2026.

“In our view, the balance of risks is drifting towards renewed tightening given persistent domestic inflationary pressures. We continue to expect rates to remain on hold this year and next, but we can’t rule out the possibility that the Bank’s next move will be up, rather than down,” he said.

For savers, Mark Hicks, head of active savings at Hargreaves Lansdown, said he expects rates to come down for easy-access accounts, with the best deals for those who can lock their money aware for longer periods.

“We’ve come through a long period where high interest rates in the short term were expected to be followed by cuts, so the best deals were available on easy-access savings,” he said.

“While savers may still be tempted to hang on in easy access, because of the flexibility it offers, they are still expected to be on their way down, and when easy-access rates fall, fixed deals will look more attractive.”

Steady rates are also good for those looking to take out annuities, said Hargreaves head of retirement analysis Helen Morrissey, who noted that these products offer “good value” for those in need of guaranteed income.

“These settled conditions will keep interest in the market high with the most recent data from HL’s annuity comparison service showing that a 65-year-old with a £100,000 pension can get up to £7,793 per year from a single life level annuity with a five-year guarantee,” she said.

Alongside holding rates steady, the Bank committed to reducing the pace of bond sales, which is to be trimmed from £100bn to £70bn over the next 12 months, a total of £488bn, in an effort to limit the impact of quantitative tightening on gilt yields, said Feather.

Brown added “A slowdown in quantitative tightening from £100bn was clearly flagged, the only question would be to what extent. The Bank's announcement that it will allow £70bn of gilts to roll off its balance sheet was broadly in line with our expectations, albeit meaning that active gilt sales will have to step up to £21bn."