UK interest rates held at 5% | the industry reacts to today's Bank of England announcement - IFA Magazine
"Fed Cuts Rates: Will Bank Of England Follow?"
With the announcement that the Monetary Policy Committee has chosen to maintain interest rates at 5% following a unanimous 8 to 1 vote, there’s still plenty for investment managers and strategists to consider. This comes as we anticipate the Autumn Statement next month, where we will learn more about the new government's fiscal strategy.
In the interim, specialists from various areas of the financial services industry have responded to the interest rate updates released today in the following ways:
Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner, commented: "The Bank of England has kept its main interest rate unchanged at 5%. With the strong inflation figures released yesterday and core inflation rising to 3.6%, this decision is not surprising. Unlike the Federal Reserve, which recently made a larger-than-expected cut of 50 basis points while managing a robust economy, the Bank of England is confronting a different set of challenges. They must find a balance between fostering economic growth and tackling ongoing inflation. Andrew Bailey, the head of the Bank, has already pointed out the 'economic costs of reducing persistent inflation,' which include decreased output and increased unemployment."
Although it's possible to anticipate that the UK’s interest rate trends will align with those of other advanced economies (with Japan being a key exception), the focus will be on how quickly these changes are put into action. This uncertainty contributes to fluctuations in the Gilt market. The responsibility now lies with the Bank of England to navigate the way forward and steer clear of the common pitfalls that often arise in such challenging circumstances.
Jonny Black, the Chief Commercial and Strategy Officer at abrdn adviser, stated, "It's not surprising that they chose to keep the base rate steady. Everyone is now turning their attention to November, where there might be a potential reduction before the year's end."
However, the Bank of England isn’t going to take any action until it is confident that inflation is managed properly and can assess the effects of Rachel Reeves’ forthcoming Autumn Statement, which is expected to bring significant challenges for the nation.
In today's rapidly changing and uncertain world, clients will rely on the knowledge of advisors to navigate the complexities of the Bank's decisions and ensure their financial plans remain effective.
Andy Mielczarek, the CEO of Chetwood Financial, commented on the Bank of England's decision, stating, "It's not unexpected and emphasizes the idea that a time of economic stability is preferable for people in Britain. With inflation remaining stable, it’s crucial for the central bank to set a calm and assured example for the public, which it has effectively achieved."
Current mortgage holders may have hoped for a bigger drop in rates, but they can still feel positive about a more stable borrowing landscape, allowing them to make solid long-term financial choices. Meanwhile, new buyers can also be encouraged by this stability, as it could lead to a more favorable mortgage situation that makes their investment options more appealing.
Right now, savers can feel relieved that the interest rates haven't changed, but they might also worry this could be their final opportunity to get the most out of their investments, particularly with fixed-rate savings accounts. It's important for them to stay proactive in exploring different options available in the market to secure the best returns before there’s a chance of another drop in the base rate.
Nick Henshaw, who oversees Intermediary Distribution at Wesleyan, stated: "While inflation seems to be more manageable at the moment, those in charge of setting rates continue to maintain a careful stance."
This means that financial advisors are in a difficult position as the rationale for keeping cash is becoming less convincing.
Our latest study revealed that nearly 75% (73%) of advisers have assisted either all or most of their clients in boosting their investments in stocks in anticipation of anticipated interest rate reductions this year. However, it’s natural for many clients to feel anxious about the higher level of risk that this situation entails.
"In this situation, smooth funds offer a reasonable compromise for clients as they start to invest in stocks again during the shift to lower interest rates."
George Lagarias, Chief Economist at Forvis Mazars, remarks: "The Bank of England kept interest rates steady even though there was a strong indication for more significant reductions following the unexpected 0.5% cut by the Federal Reserve yesterday. In contrast to the US central bank, the Bank of England is cautious about declaring a win over inflation, even as it deals with more challenging economic growth conditions. Nevertheless, we anticipate that the Bank will accelerate its rate cuts in the upcoming meetings, given that both the US and the European Central Bank are moving towards more aggressive reductions."
Joe Pepper, the Chief Executive Officer of PEXA in the UK, stated, "Keeping the base rate unchanged is disheartening for those borrowing, but it wasn't unexpected given the inflation data released yesterday. Now, we anxiously await the next MPC meeting in November. However, that outcome will also depend on how the market responds to the Labour government's inaugural Budget."
Regardless of whether the interest rate drops in November, we can expect a significant surge in demand during the last two months of the year. This is largely because many individuals will be reaching the end of their fixed-rate agreements. Additionally, a forthcoming budget is likely to emphasize the government's intention to tackle challenges in the housing market due to its positive impact on the economy. As a result, there will be an increase in consumer demand, which will put even more strain on the already overloaded conveyancing system that is not prepared to cope with this uptick.
Putting money into updating the behind-the-scenes processes and technology is essential for tackling this issue. While private funding is important, for it to work effectively across the country, government backing is also needed. It's crucial that various sectors work together to achieve this modernization, and it cannot happen too quickly.
Ed Monk, the associate director for personal investing at Fidelity International, remarked that the 8-1 vote by the MPC to maintain interest rates was unexpected, considering the latest economic data indicates a slowdown in growth. This led to some anticipation that rates might be reduced this month. However, the strong vote in favor of keeping rates steady might imply that the Bank believes a phase of underwhelming growth is essential to tackling persistent high inflation. As a result, borrowers will need to be patient while waiting for interest rates to decline, even though that seems to be the trend moving forward.
As the year has gone on, predictions about future interest rates have been adjusting downward. Before the announcement, market forecasts indicated that rates could fall below 4% in the next 18 months. Given that inflation remains just above target and is anticipated to increase again this year before stabilizing, the actual returns on cash are expected to be lower than what we've experienced in the last two years.
Now is a great moment for investors to reevaluate how much cash they hold compared to their investments. Cash and investments serve different purposes in your financial strategy, and it's wise to have a mix of both. Many investors may have recently focused on the attractive returns from cash and moved their funds away from investments. This shift has generally paid off over the past two years, as cash returns, when adjusted for inflation, have been solid, even if they still fall short of stock market gains during that period. However, when looking at longer timeframes, putting money into assets like stocks and bonds historically yields better returns that outpace inflation compared to keeping it all in cash.
Derek Sprawling, who is the Managing Director of Savings at Paragon Bank, said, “Even though the Monetary Policy Committee decided to maintain interest rates today, the market anticipates that the Base Rate will decline further, which will naturally affect savings rates. Given this situation, it makes sense for savers to think about securing appealing fixed-rate offers now, as they are likely to decrease in the months ahead.”
Rob Hudson, who oversees International Banking and Payments at FIS, commented: "It’s not shocking to see interest rates remain at 5%, especially after the recent ONS report indicated that inflation remains steady at 2.2%. Still, this news is tough for the British public to digest."
As winter draws near, many people start looking to their savings to help them celebrate Christmas and to bridge the longer gap between December and January paychecks. Unfortunately, 35% of individuals in the UK say they have under £500 saved up. Because of this, the recent news from the Bank of England might lead some to make the tough choice to scale back their celebrations this year to steer clear of expensive loans.
Even so, financial stress might not rise as anticipated this winter. Nearly half of Brits—48%—are practicing what’s being called ‘loud budgeting’, which means they are openly managing their finances. This shift shows that talking about money isn’t a stigma anymore. As a result of this increased transparency, people are staying more informed about their financial situations and making smarter use of their funds.
Andrew Gething, the managing director of MorganAsh, remarked, “Even with recent reductions from the European Central Bank and a significant cut from the Federal Reserve last night, the Bank of England has chosen to keep its current stance. This decision wasn't surprising, especially after their initial cut last month and the careful, measured strategy they intend to uphold regarding interest rates.”
"We can take away some good news: we are moving towards interest rate reductions. The real question is how long it will take and what the final outcome will be. This is particularly relevant for people with tracker or variable-rate mortgages, as they see the benefits of a rate cut right away. Although last month’s reduction eased some financial strain for families and made it easier for new borrowers, many households are still facing significant financial challenges. At least there is a general agreement that another cut is likely in November."
In the financial services industry, paying attention to vulnerable customers is more crucial than ever. Regulators are stepping in to hold companies accountable if they fail to recognize these customers or provide positive outcomes for them. As household finances become tighter, affecting health, well-being, and overall living conditions, more individuals are at risk of falling into a vulnerable state. While interest rates may be rising, it’s essential for us to stay vigilant in recognizing and supporting vulnerable customers, making this a top priority for us at all times.
Richard Pike, the chief sales and marketing officer at Phoebus, commented, “Given that the UK economy is stagnating and inflation is expected to rise once more as the year wraps up, the committee's decision is not unexpected. Markets had estimated a one-in-five possibility of a reduction in the Bank Rate, so this decision aligns with those predictions and is unlikely to lead to significant shifts in product pricing.”
Many lenders have been hesitant to lower their fixed rates for quite some time, so there's still potential for more competitive pricing. I believe that November will bring a change, as the markets are forecasting a 0.25% decrease in the Base Rate.
Rob Morgan, the Chief Investment Analyst at Charles Stanley, mentioned: "Inflation typically doesn't decrease in a straightforward manner. Therefore, the uptick in the Consumer Price Index (CPI) inflation, which exceeded the Bank of England's 2% target in July and August, hasn't sparked much concern among decision makers. In fact, the current inflation trends are running lower than the Bank's earlier predictions."
However, the most recent data did not lead a majority of the MPC members to support a rate cut today. The continued high level of core inflation is a significant worry, and inflation in the services sector remains too high to warrant another action so soon after the reduction in August. Instead, a decision in November appears more likely. By then, the data might indicate a further easing of wage pressures that contribute to services inflation, and any effects from the Budget on October 30th can be evaluated. If the Budget is particularly restrictive, it might shift the balance toward a quicker easing of monetary policy from that point onward.
The US Federal Reserve has made a significant cut to interest rates, reducing them by 0.5% instead of the more anticipated 0.25%. This decision has added uncertainty ahead of today’s vote. However, the situation for the Bank of England (BoE) is different from that of the Fed. In the US, inflation has clearly dropped back to the target level. In contrast, the UK is still facing challenges from a very tight labor market, which is causing ongoing wage pressures. As a result, there is less assurance that price increases will decrease in a uniform manner. Businesses and households looking for relief from the burden of high interest rates will have to be patient. Forecasts indicate several rate cuts may occur over the coming year, and if inflation improves as expected, a gradual decline to around 4% by mid-2025 could help restore consumer confidence and stimulate economic growth.
Nonetheless, we shouldn’t assume that things will stay this positive. The inflation forecast is influenced by various elements: a robust job market that's driving up wages and maintaining high service costs, tensions in international relations, and the ongoing effects of adjusted supply chains. Interest rates are expected to stabilize at levels significantly higher than they were before the pandemic, and there are still potential upward risks to consider.
Lindsay James, an investment strategist at Quilter Investors, noted that even with the significant rate reduction in the US yesterday and ongoing cuts in Europe, the Bank of England chose to keep its rates steady after making its first cut in four years last month. However, while today marks a temporary hold, there is a strong belief that more rate reductions are likely later this year and into next year as economic growth starts to slow and inflation hovers near the target level. Financial markets anticipate two additional cuts, and with 2024 approaching, the Bank of England's next meeting is expected to result in another reduction.
However, looming over everything is the Autumn Budget scheduled for the end of October. While an increase in taxes is inevitable, the exact amount remains uncertain, making it difficult to evaluate the economic impact. As a result, both businesses and consumers may reduce their spending in preparation for potential changes in their income, which could lead to a further decline in growth. With Labour focusing on wealth creation and economic growth ahead of the election, they might need to count on the Bank of England to support this in the short term by implementing more frequent or larger interest rate cuts than previously anticipated.
"A reduction in rates would be particularly beneficial for both consumers and businesses, as the economy is teetering on the brink of stagnation. After enjoying a strong and encouraging start to 2024, troubling signs are appearing once more, indicating that the Bank of England will need to take action sooner rather than later."
