UK interest rates remain at 5.25% after the Bank of England’s Monetary Policy Committee (MPC) elected once again to keep steady in the wake of higher-than-target inflation figures, but cuts are coming, according to experts.
The committee voted six members to three in favour of standing pat, with two preferring to raise rates to 5.5% and one in favour of cutting already to 5%.
The mix of views comes after inflation surprised on the upside in December, when the reading rose to 4%, according to figures from the Office for National Statistics earlier this month.
Lindsay James, investment strategist at Quilter Investors, said: “The Bank of England has continued its steady as she goes approach with interest rates by holding them again. Given economic growth is stagnating but not yet properly declining, and with confidence improving, the BoE will want to keep its powder dry before pivoting to rate cuts later in the year.”
Indeed, it appears to be a case of when, rather than if, the Bank will cut rates in 2024, according to Myron Jobson, senior personal finance analyst at interactive investor.
Yet rates remain high and people should expect this to continue for some time, he noted, while there are “no indications that we will see the return of ultra-low-interest rates that ensued after the financial crash”.
“Any cuts to the base rate are likely to be modest compared to the substantial rise in rates since early 2022. High interest rates continue to have ripple effects on personal finances. As such, it remains important to keep on top of your finances and make the necessary adjustments to maintain financial resilience,” Jobson concluded.
Yet there are signs that the battle against inflation is being won. Forecasts suggest price rises could fall to the 2% Bank target within the next few months as commodity prices have fallen and the labour market softens.
The timing of rate cuts is unknown, with many suggesting it could be much later in the year. But Chris Beauchamp, chief market analyst at IG Group, noted: “It’s interesting to see one member of the MPC break cover and call for a rate cut, the first one since the frenetic days of the Covid pandemic.
“This shows that we have the makings of a push for rate cuts, something that will gather strength on the MPC, particularly now the Fed has reinforced its belief that rate cuts will happen in 2024.”
The announcement today came after the US Federal Reserve elected to pause rates again this month. The key for commentators however was the change in rhetoric, where the reference to “additional policy firming” was dropped.
Whitney Watson, co-head and co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said the market has now priced in a 50% chance of a rate cut as early as March.
“[This] seems reasonable given the recent positive signals from the Fed's preferred measures of inflation and wage growth,” she said.
Anna Stupnytska, global economist at Fidelity International, said the Fed could have opened the door to rate cuts in the next few meetings, but the accompanying statements were quick to quash this notion.
The big sticking point is inflation data, which continues to come in stronger than expected. “In the press conference, Chair Jerome Powell stressed that the FOMC needs to have greater confidence that inflation is moving to target sustainably. He emphasised the Fed remains data dependent, is not declaring victory over inflation just yet and March is not a likely start to the cutting cycle,” she said.
“We believe it will take a bit longer for the Fed to accumulate more evidence on inflation and get more clarity on how monetary policy transmission works its way through to the economy. This rules out an early start to the cutting cycle, which is consistent with Powell's comment on March not being the base case.”
Kevin Thozet, a member of the investment committee at Carmignac, added there will be questions over how far and fast the Fed will move when it does start to cut rates, but said “all signals are turning green for it to start adopting a more dovish policy if needs be, as current policy rates are far above the neutral level of interest rates. The goldilocks scenario is in full play.”
Regardless of when the Fed cuts rates, Watson noted that now is the time to secure “attractive yields on high-quality bonds” as rates look set to end the year lower than they started it for the first time in two years.