Following the news that the US Fed kept interest rates on hold yesterday, today’s announcement from the Bank of England regarding UK base rates had been nervously awaited.
Market watchers had generally been expecting the Bank to keep rates at a fifteen year high so the news that the MPC have kept rates at 5.25% hasn’t come as a surprise.
In their September meeting, in a split vote, the MPC decided to keep the UK interest rate at 5.25% following a drop in inflation. With the UK economy having managed to avoid going into recession territory so far, the MPC’s task of trying to balance the need to bring inflation back to target with the impact of time lags and the slow down in economic growth, is certainly a tricky one.
Markets have been warned by the Bank to expect that interest rates will have to be kept higher for longer, something which has clear implications for the advice process and for millions of people across the UK as the cost of living crisis continues to bite. But what does it mean for investors, consumers, businesses, investments – and advisers?
Finance experts have been sharing their views on today’s interest rate decision as follows:
Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:
“The Bank of England decided to maintain its policy rate at 5.25%. Interest rates are at levels last seen before the financial crisis, signalling that the battle against stubborn inflation is far from over. In the face of increasing wage inflation, on one hand and slowing growth in the economy on the other, the Central Bank needs to tread a cautious line. There is also an expectation set by the Central Bank that it will follow the “Table Mountain” strategy – one in which rates rise and remain elevated, albeit steady, for a long period of time.
“While the impact of rate hikes take time to permeate through the wider economy, an extended period of high rates can cause a further deterioration in the consumer mindset. We already notice an uptick in the unemployment rates (though questions have been raised about the quality of data) as well as a dip in the PMI figures, which indicates a slowing economy.
“Policy setters will have to look forward and decide what is beneficial for the overall economy – an acceptable level (albeit higher) inflation or an economy wallowing in the doldrums. This, in itself, presents the challenge – almost akin to being caught between the horns of a dilemma.”
Lindsay James, investment strategist at Quilter Investors, said:
“As was strongly signalled, the Bank of England today continued its pause on interest rates at 5.25%. While on the surface, this may look good news, it doesn’t mean that financial conditions are easing anytime soon. Data shows that the effective interest rate on outstanding mortgages is at 3.14%, whilst the average quoted rate for new or refinanced mortgages now sits at around 5.5%. With around 30% of mortgages due to be refinanced over the next two years, homeowners are still likely to face a painful upward adjustment of their payments, acting as an ongoing headwind for the UK economy.
“Although the most recent monthly inflation data showed no change to the annual rate of CPI, the British Retail Consortium has indicated that annual shop price inflation dropped more significantly in September, thanks to falling prices for homegrown food which is welcome news for the Monetary Policy Committee as well as hard-pressed consumers. However whilst inflation may be showing signs of slowing, so is the outlook for economic growth with corporate insolvencies now running at the fastest pace since 2009. This makes the Bank of England’s job in guiding the economy through this inflationary period even tougher, particularly with the threat of recession looming in 2024.
“The good news for consumers, however, is that unlike in the US, where a more robust economy has kept the possibility of a further rate rise on the table, in the UK it is more likely that the peak of interest rates has now been reached. For investors, this is a good sign too, as the end of the hiking cycle, and the subsequent cuts, can often bring about very strong returns. While markets may not be shooting the lights out, remaining invested over this period is going to be crucial.”
Kirsty Watson, chief operating officer, adviser at abrdn, said:
“After last month’s decision to hold interest rates, we’re now seeing this trend continue with rates holding steady again at 5.25%. In what is still a very dynamic economic landscape, there’s a lot of speculation swirling about the Bank of England’s future strategy, and whether another rise could be seen before the year end.
“Clients will be looking to their advisers for help understanding what economic factors will drive future rate decisions and what any potential outcomes could mean for them. Now is a perfect opportunity for advisers to have a conversation with clients about how their savings and investment plans are prepared for future eventualities and what changes may need to be made to adapt them even more. As always, the emotional element of reassurance will be just as valued as the practical financial expertise.”
Karen Barrett, Founder and CEO of www.unbiased.co.uk, said:
“Interest rates holding at a high level brings difficult mortgage decisions to the forefront for many Brits. As a result, mortgage rates will remain historically high – and people looking to take action on a mortgage are incentivised to wait for a fall – which brings some risks.
For remortgagers whose fixed deals are ending, waiting will mean they bear the full brunt of their lender’s standard variable rate. Alternatively, you can talk to a broker about locking in a fixed-rate mortgage six months before your deal expires, and switching again if a better rate appears.
Meanwhile, prospective buyers will now also hold fire and risk failing to take advantage of property prices that are being cut at the fastest rate in a decade, creating another barrier to getting onto the property ladder. If you’re trying to make a decision on your mortgage, you should check in with a mortgage adviser, who will be able to carefully consider your overall financial situation, and recommend the right product.”
Nick Henshaw, head of intermediaries at Wesleyan, said:
“The Bank of England looks to be pursuing its ‘Table Mountain’ strategy of keeping interest rates high until it can be confident the inflationary threat is gone. A fall in rates could still be some time away but advisers and their clients will already be thinking about what they should be doing with their capital when that time comes. This will be a particularly challenging question for those who are more averse to volatility and have enjoyed the investment profile and returns that cash has offered as rates have risen.
“I expect that smoothed With Profits funds will be an attractive option to these clients. These funds work by smoothing sharp ups and downs in the investing journey , while still giving money the chance to outpace inflation and grow in value over the long-term. They’re also increasingly available on platform, with some even offering daily pricing, smoothing and trading so they can fit seamlessly within an on-platform investment portfolio.”
Glenn Collins, Head of Technical and Strategic Engagement at ACCA, said:
“The previous month’s hold of interest rates at 5.25% was a welcome and necessary breather after 14 consecutive rises. However, it now appears that the UK economy is stuck holding its breath, awaiting some kind of economic sign to help kick-start the reduction in interest rates.
“This holding pattern or a ‘wait and see’ attitude is something ACCA has seen translate to the feedback from accountants about the businesses they support. A sense of “perma-crisis” has left businesses hesitant to invest, delaying decisions until a clearer picture of the prospects for the UK economy emerges. It seems inevitable that further action, in addition to the Bank’s single monetary policy lever, will be required. Undoubtedly, the Chancellor has an important Autumn Budget statement ahead.
“Without decisive action from the government and Bank of England this winter, businesses and customers will struggle to cope with continuing high rates of interest and inflation, further damaging an already weakened economy as people spend less and businesses are unable to invest or expand.”
Andrew Gething, managing director of MorganAsh, said:
“After so many successive rises, news that the base rate will remain unchanged is certainly positive. This continuity will be most welcome among the proportion of borrowers who are on tracker or variable rate mortgages, providing some much needed certainty for what will be one of their largest monthly outgoings.
“While no increase is good news, the expectation is that rates will stay at an elevated level for much longer as sticky inflation remains a clear obstacle. Alongside challenges in the wider economy – particularly around wage growth – the Bank of England will also have one eye on a jump in mortgage arrears. Even with the consensus that inflation will continue to trend downwards, future rises are certainly not off the cards. With sustained pressure on household budgets, firms across financial services must stay close to clients to identify their potential stresses and vulnerabilities.
“This is of course a key pillar of Consumer Duty – and the clear requirement for all financial services firms to deliver good outcomes for clients. As the FCA highlighted recently, firms should not be treating the regulation as a ‘one and done’ box-ticking exercise. Instead, it should become a fundamental part of each business’s core operations, procedures and culture. In particular, monitoring outcomes for different groups (including the vulnerable) must remain a priority – an onerous task without the necessary technology to identify and monitor all clients.”
William Marshall, Chief Investment Officer at Hymans Robertson Investment Services (HRIS), said:
“Earlier this week, the British Retail Consortium released data showing a large fall in high-street inflation, especially for food. In addition, signs that the labour market is weakening have continued to emerge over the past few weeks, with unemployment rising and wage growth falling, although still high. Other sources of data indicate that wage growth might even be lower than the official figures.
“The BoE has started to put more weight on these alternative data sources such as HMRC’s PAYE, especially as the ONS recently cautioned that the accuracy of their labour market data is becoming increasingly uncertain. Potentially dodgy data is far from ideal for the BoE but they will take comfort that it is at least heading in the right direction.
“Although it is looking increasingly likely that we have reached the peak in interest rates, the BoE has been keen to reiterate that they expect rates to be held at this level for a sustained period of time – markets are not pricing in a rate cut until next Autumn. Investors might think that the level of interest rates on offer makes it an opportune time to save in cash rather than investing. It is correct that cash is more attractive than it has been for a number of years, but the same can be said for bonds and other assets that should still deliver better returns in the long-term.”
Hetal Mehta, Head of Economic Research at St. James’s Place, said:
“Another MPC meeting and other vote split – it’s a mark of how mixed the data has been and the uncertainty ahead. Modern day central bankers aren’t used to dealing with huge supply shocks. Like the Fed and the ECB, the BoE is most likely done hiking now.
“I don’t think the BoE can afford to take their eye off the ball – with wage growth still so high and inflation far from the 2% target, it will be very difficult to signal a cut in interest rates in the near term. As the economy weakens, there is an increasing risk that we see one or two MPC members start advocating for rate cuts soon, but it will be some time before the majority is in that camp.”
Edward Park, Chief Investment Officer at Brooks Macdonald, said:
“The Bank of England maintained its interest rate at 5.25% today, mirroring the Federal Reserve’s pause decision from yesterday. This implies that the central bank forecasts the current level of UK interest rates will be sufficient to continue to bring down the UK’s still high inflation.
“The question is now how long the Bank of England will stay at its current rate. On the one hand, it wants to keep inflation under control. On the other hand, it’s staring down sluggish economic growth and a weakening jobs market, both of which were explicitly called out in the Bank’s statement.
“Given the delayed impact of monetary policy and the cloudy economic outlook, the Bank has remained flexible in its approach. For now, the Bank is observing the impact of its prior rate adjustments before making another move. It’s significant to mention that the decision to hold the rate was split, with 3 members of the Bank of England supporting a rate hike.
“Should inflation remain elevated the hawks at the Bank of England are likely to attract additional support from voting members concerned around price pressures. The Bank also downgraded its expectations for UK economic growth, expecting stagnation in Q3 2023 followed by the smallest of expansions in Q4.”
Laura Suter, head of personal finance at AJ Bell, said:
“The nation will be breathing a sigh of relief that the Bank of England has followed expectations and held interest rates for the second month in a row – hopefully ending almost two years of consistent hikes. Maintaining rates at 5.25% will raise hopes that we have finally hit peak interest rates – and that the only route from here is down.
“But anyone hoping for a drop in rates as steep and swift as the climb up will be disappointed. Markets are pricing in no cuts until Autumn next year. It means that rather than a traditional ‘mountain’ shaped rise and fall in rates we’re expecting a table-top mountain, where rates tick along at the same level for almost a year before a slower drop back down.
“The Bank itself says the market expects rates to only hit 4.25% by the end of 2026 – showing how glacial the path down could be. With risks like the conflict in the Middle East and a potential spike in oil prices, not to mention the potential for a surprise in inflation numbers or another economic data point, we can’t entirely rule out any further rate hikes. And the Bank has certainly not ruled it out, if it sees ‘more persistent inflationary pressures’. The fact that a third of the MPC voted for a rate hike today shows there is still appetite among the committee to tighten monetary policy further.
“Peak rates mean that it’s time for savers to get moving if they haven’t yet locked in a fixed rate deal. With no further rises expected, this is probably as good as it gets for savers – so anyone who has been waiting for rates to improve should start shopping around now. Equally, peak interest rates might spark more people who are re-mortgaging to move to a tracker rate. We’ve already seen a big increase in the number of homeowners opting for trackers, rising from 6% of all new mortgages at the end of last year to 16% in the second quarter of this year. But anyone moving to a tracker needs to be sure that their finances won’t be derailed if another rate hike does materialise.”
George Lagarias, Chief Economist at Mazars, said:
“Another day, another pause and another fight at the BoE. As expected, the UK central bank retained its key interest rate for the second time in a row, mirroring the Fed’s decision yesterday. It is clear that the Bank’s board members are looking outside the window at an economy that has barely grown in the past year.
“Unlike the US, the holder of the world’s reserve currency, the UK can’t fiscally support its economy without risking a backlash in the bond market, similar to last September’s. Further hiking would risk tipping a barely growing economy into a recession. External members seem to disagree, possibly adhering to stricter economic dogma. However, the Bank’s intention is now clear, and the scale has been tipped for growth rather than for controlling inflation.”
Georgina Taylor, Head of Multi Asset Strategies UK at Invesco, said:
“In our view the Bank of England could be the first major Central Bank to cut rates ahead of the Fed and the ECB. UK economic data are softening more quickly than in the US, and the BoE has a dual mandate – targeting growth and inflation – unlike the ECB.
“UK Inflation is falling albeit is still above target, slack is building in the labour market, and some indicators such as insolvencies are showing very worrying signs of an economy coming under meaningful pressure. Those signals support the idea that, at the very least, peak rates have been reached for this cycle. The UK economy is more sensitive to interest rates than the US given the structure of the housing market which comprises a greater proportion of shorter-term and variable rate mortgages. Therefore, cutting interest rates in the UK should feed more quickly to improved consumer and corporate confidence.
“We cannot discount entirely the risk that the BoE might be slow to reverse its current course given still elevated inflation and the split in the vote today shows the debate within the committee. The Committee is thus at least cognisant of the need to navigate between Central Bank credibility in the face of higher inflation and the economic risks that are building in the system.
“Some more hawkish members of the MPC that are erring on the side of over-tightening, believe monetary policy can respond swiftly further down the line should the economy significantly deteriorate, and thus believe it is prudent to keep policy tight until it is clearer that inflationary pressures have subsided. The doves on the committee have a greater focus on the flexible inflation mandate of the BoE and see economic weakness as a medium-term threat that should be addressed.
“This debate will keep the market guessing on the policy over the coming months but in the face of a slowing economy and reaching peak rates, we believe the coos from the doves will get louder and UK Gilts are now an attractive addition to our multi asset portfolios.”
Rachel Winter, Partner at Killik & Co, said:
“The news of rates staying the same indicates that we may have already reached the peak of the interest rate cycle, which will allow households to breathe a collective sigh of relief.
“However, the current unrest in the Middle East has led to a rise in oil prices, which will put upward pressure on inflation and make it more difficult for the Bank of England to get inflation down to the target rate of 2%. Brent Crude has risen by over 10% in the last three months. The next set of inflation figures for the UK will therefore be scrutinised even more closely than usual.
“As always, it’s important that investors keep a diversified portfolio to help offset any impact on specific sectors or holdings. Gilts also remain an attractive option for investors seeking an alternative to stocks.“
Ed Hutchings, Head of Rates at Aviva Investors, said:
“With no change but close to 0.75% of cuts priced for 2024, the BoE seems keen to push back on markets getting carried away with cuts. With the lagged effects of past interest rate hikes still to feed through to the economy, weaker growth should well be expected going forward.
“This should largely be supportive for the currency, but elsewhere, the direction of travel on gilt yields in the near-term is more unclear. Medium-term however, with weaker growth and past hikes yet to feed through, we are close to all but done with interest rate hikes, which is ultimately supportive for gilts.”
Becky O’Connor, Director of Public Affairs at PensionBee, said:
“Expectations of further rate rises have dampened – this looks like a point of rest for rates, before possibly falling again some time next year. If that’s the case, the market volatility of the past few months could settle, benefiting pension savers who depend on investment performance to boost their pots.
“For those approaching or in retirement who have found managing their retirement and withdrawal plans stressful because of market ups and downs, this potential change in monetary policy direction might offer some respite. For people with retirement money tied up in savings, it will be important to keep chasing decent rates, as high-paying accounts may not hang around for long.
“Meanwhile retirees who are weighing up whether an annuity is the best way for them to take an income might want to consider that annuity rates may not be as attractive as they are now, in a year’s time.
“Households with mortgages might now be able to look to a future remortgage date with a little less dread, if mortgage rates continue to respond to expectations that the base rate has no further to rise and may indeed start falling.This may allow people trying to build up their retirement savings alongside other financial commitments a renewed opportunity to divert more disposable income to long term savings, helping to restore financial resilience during a difficult period for those with debt.”
