After the news last night that the Fed had decided to cut US interest rates for the first time in four years and by more than expected, by 0.5%, there was a glimmer of hope today that the Bank of England might continue with further cuts.
However, with the news that the MPC have decided to keep rates on hold at 5% in an 8/1 split, there is still much to assess for Investment Managers and Strategists, especially with the Autumn Statement due next month when we’ll find out the detail of the new Governments fiscal approach.
In the meantime, reactions have been pouring in from Investment professionals and economists to today’s UK interest rate news, what it means for the UK economy and the markets as follows:
Tim Graf, Head of EMEA Macro Strategy at State Street Global Markets, said: “The Bank of England’s decision to keep rates on hold today comes as no surprise, but the gradualist approach to easing expressed in the accompanying statement and priced into rate markets may be challenged in time. Though official measures of service price inflation remain sticky, our Pricestats metrics of online inflation show pressures having cooled significantly in recent months. The rate market pricing of monetary policy to remain tight relative to where neutral interest rates are assumed to be, for at least the next three years, strikes us as overdone, particularly with the Federal Reserve and other central banks starting to ease more forcefully.”
As the Bank of England votes to hold the base rate, keeping its options open – Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services said: “The Bank of England’s Monetary Policy Committee (MPC) has voted to keep the base rate at 5.0% – a move that did not come as a great surprise. When cutting rates in early August, the Committee made clear that the decision was finely balanced, and Governor Andrew Bailey warned of the risks of cutting too much, too fast.
“Since that decision, the UK economy has slowed and inflation has inched higher following a momentary dip in early summer. Looking ahead, October’s Budget is fast approaching, and the MPC’s voters may be inclined to reconsider rate changes in November’s meeting, when they will have seen the package of fiscal measures announced by the Chancellor.
“Nonetheless, policy adjustments to-date have taken longer to impact the economy and have done so with less strength. As such, any further weakening in price pressures may require the Bank to be more nimble in the future. Therefore, the strong likelihood remains that interest rates will continue to fall over the remainder of this year and into the next, allowing households and businesses to plan with greater confidence.”
George Godber, Fund Manager of the Polar Capital UK Value Opportunities Fund said: “The UK inflation data came as expected yesterday and, unsurprisingly, the Bank of England has held rates today. This continues a series of well-telegraphed decisions in the wake of well-anticipated in-line data. It is indicative of the UK regaining its reputation for predictability and stability and a necessary step for lowering the cost of capital in the UK”.
Katharine Neiss, PGIM Fixed Income, said “As expected, the Bank of England bucked the trend of the Fed and ECB and kept rates on hold at today’s meeting. The Monetary Policy Committee’s 8-1 vote – rather than the 7-2 some had expected – is a somewhat hawkish signal for markets.
The BoE is continuing to be cautious when it comes to future cuts – with wages, services, and core inflation still uncomfortably high. It is also keen to keep the risk of a wage-price spiral in check heading into early 2025 wage negotiations.
With the UK economy performing better than expected recently, there is no urgency to cut rates. If data from the BoE agents’ survey in December looks good in terms of meeting the 2% inflation target, this could drive a pivot towards more aggressive cuts in early 2025, especially given how far the BoE is from neutral rates. Yesterday’s Fed 50bps cut paves the way for this move.
Today’s meeting was primarily about quantitative tightening. In the face of a wide range of predictions, the BoE opted for the lower end of expectations – a small amount of active sales to offset the £87bn passive runoff. A faster pace could have proven problematic in the future should the BoE need to go below neutral to stimulate the economy.”
Ben Nichols, Managing Director at RAW Capital Partners, said: “Yesterday’s inflation print all but confirmed today’s decision, though the markets had been expecting it for some time. With core and services inflation both applying pressure in August’s CPI, policymakers clearly want to see a sustained downward trend in the underlying figures before opening the door to a more aggressive rate-cutting cycle.
“Today’s rate hold, therefore, may seem like something of a setback, particularly for property buyers and borrowers, but it should have a consolidating effect that will provide greater market and economic stability in the medium to long term. We can probably expect at least one further rate cut before year-end, which should provide a boost to investor sentiment. In light of this, we expect numerous opportunities to arise in the coming weeks and months, especially for investors who diversify their portfolios to meet the ever-changing nature of the markets.
“Indeed, while the BoE is holding rates, the ECB is cutting them, and the Federal Reserve is following suit. As such, we could see some fluctuations in the markets as the major banks relax their monetary environments at different paces and to different degrees. So, investors could look to alternative investments like real estate, private debt and other non-traditional assets to ensure that their portfolios remain robust in the face of any potential volatility.”
Lindsay James, investment strategist at Quilter Investors, said:
“Despite the supersized rate cut in the US yesterday and cuts continuing to be enacted in Europe, the Bank of England has decided to hold rates following its first cut in four years last month. However, while today may be a pause, the general consensus is to expect more rate cuts this year and into next as the economic momentum that had built up slows and inflation remains close to target. Two more cuts are expected by financial markets, and with time running out in 2024, the next meeting is likely to see the BoE’s next cut delivered.
“The spectre hanging over all of this, however, is the upcoming Autumn Budget at the end of October. Taxes are guaranteed to rise, but by what extent we are not sure and thus the economic impact cannot be properly gauged. Businesses and consumers are likely to cut back on spending in anticipation of changes to their income and as such growth could slide further. Given Labour’s emphasis on wealth creation and economic growth in the run up to the election, it may in turn, have to rely on the Bank of England to deliver this in the short term by providing more regular or larger rate cuts than perhaps would have been expected otherwise.
“A rate cut would have been especially welcomed by consumers and businesses alike, given the economy remains close to stall speed. Having had a positive and rather buoyant first half of 2024, dark clouds are gathering once again and as such action from the BoE will be required sooner rather than later.”
Rob Morgan, Chief Investment Analyst at Charles Stanley, said:
“Price rises rarely subside in a straight line, so the reacceleration in CPI inflation to above the Bank of England’s 2% target in July and August hasn’t caused significant angst among policymakers. Indeed, price rises are trending below the BoE’s own previous forecast.
“Yet the latest picture also didn’t compel a balance of MPC members to vote for a cut today either. The strength of core inflation remains a concern, and services inflation is still too elevated to justify acting again so soon after August’s reduction.
“Instead, a move in November seems odds on. By this stage the data may show a further moderation in wage pressures which feed into services inflation, plus any ramifications from the Budget on October 30th can be considered. A particularly fiscally tight Budget may tip the scales towards a more rapid loosening of monetary policy from that point.
“The US Federal Reserve taking a hatchet to interest rates, slashing by 0.5% instead of a more expected 0.25%, further served to cloud the picture ahead of today’s vote. However, The BoE is in a different place to the Fed. Across the Atlantic inflation has more decidedly fallen back to target. Meanwhile, the UK is still suffering from the effects of an unusually tight labour market and resulting wage pressures. There is simply less comfort that price pressures will concertedly subside.
“Businesses and households hoping for further reprieve from higher interest rates will therefore have to wait a little longer. A series of cuts are pencilled in by forecasters over the next year, and if all goes to plan on the inflation front a gentle trajectory back down to the 4% level by mid-2025 should help improve consumer confidence and boost the economy.
“However, this more benign scenario should not be taken for granted. The inflation outlook is clouded by several factors: a strong jobs market keeping wages buoyant and services costs high, a more fractious geopolitical backdrop and the lingering impact of reconfigured supply chains. Interest rates will level out much higher than pre-pandemic, and there remains risk to the upside.”
Luke Bartholomew, Deputy Chief Economist, abrdn, said:
“No surprises today from the Bank of England. We expect the Bank to maintain a relatively cautious approach to easing, with rates being lower again in November, and continuing with a pattern of cutting rates once every other meeting.
“Clearly, the Bank’s relative caution stands in some contrast to the Fed’s strong start to its easing cycle, with a 50bps cut yesterday. This difference in policy partly reflects different mandates of the two central banks, but also the different growth and inflation outlook.
“Underlying inflation pressures in the UK remains elevated, while the labour market is sending quite mixed messages about the health of the economy. This divergence should help support the pound for now. But attention in UK markets may increasingly shift away from monetary policy and towards fiscal policy as we approach the Budget at the end of October. Certainly, the Bank will need to incorporate any fiscal changes in its next forecasts, which could provide the foundation for more rapid cuts in due course.”
Ed Monk, associate director for personal investing at Fidelity International, said:
“The 8-1 MPC vote to hold rates is a surprise given recent economic data has shown growth slowing. That created some expectation that rates could be cut this month but the strength of the vote to hold them perhaps suggests that the Bank sees a period of below-potential growth as being necessary to get the last bit of high inflation under control. It means borrowers will have to be patient in their wait for rates to fall, even if that is now the direction of travel.
“Expectations for where rates will land have been moving lower as the year has progressed. Market prices ahead of the announcement suggested rates will dip below 4% within 18 months. With inflation sticking slightly ahead of target and expected to rise again this year before settling, real returns from cash are likely to be lower than has been the case over the past two years.
“That makes now a good time for investors to reassess their balance of cash versus investments. The two do different jobs in your financial mix and it makes sense to hold both, however many will have jumped on the high returns available recently from cash and shifted assets away from investments.
“That plan has largely worked in the past two years as inflation-adjusted returns from cash have been strong, although still lagging the stock market in that time. Over longer periods, however, investing in assets like shares and bonds has a better record of producing inflation-beating returns than cash.”
Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:
“The Bank of England has held its headline rate at 5%. Given the resilient inflation numbers seen yesterday, as well as core inflation increasing to 3.6%, this is hardly surprising. Unlike the Federal Reserve which delivered a larger than expected 50bps rate cut while overseeing an economy which is humming along nicely, the Bank of England faces different challenges – one of a need to balance growth within the economy vis-à-vis this very persistent inflation. In fact, Andrew Bailey, the chair of the Bank, has already spoken of the “economic costs of bringing down persistent inflation” – lower output and higher unemployment.
“While it is not unfeasible to expect that the trajectory of rates in the UK will follow that of the other Central Banks of the developed world (Japan being the other notable exception), it is the speed of implementation that will be closely watched. All of that creates uncertainty, which translates into volatility in the Gilt market. The onus will be on the Bank of England to manage the path forward and avoid all the policy pitfalls that are par for the course in such a tricky situation.”
Laura Cooper, Nuveen’s Global Investment Strategist, said
“The Bank of England is practicing patience, defying the path of its U.S. peers, in maintaining a cautious stance to the future policy decisions. In skipping a rate cut this round, policymakers largely met expectations with an 8-1 vote capturing consensus building after a split 5-4 tilt to start the easing cycle last month.
“Confidence in the progress of slowing price pressures tipped the scales to easing last month, an assessment that was not evident in the decision today. A nod to the “absence of material developments” alongside inflation persistence having not yet dissipated sufficiently warranted a pass on a consecutive cut, though with the growth risks of restrictive rates building, policymakers are poised to further reduce the Bank Rate by 25bps in November, in our view, confirmed by the statement signaling an ability to cut rates “gradually over time”.
“As focus turns to the fiscal backdrop and the upcoming October budget, the Bank of England’s reluctance to follow major peers in a swifter cutting cycle will be challenged. Stubborn services inflation should ease as labour market slack builds. With fiscal effects to be weaved into policymakers’ November forecasts, a potential period of tax rises and public spending curtailments could warrant a steeper cutting cycle, keeping us comfortable with UK duration and reluctant to lean into the recent GBPUSD run-up.”
Jamie Niven, Senior Portfolio Manager, Candriam, said:
As expected by the market, BoE held rates steady but with a slightly hawkish leaning in the vote composition (only one vote for a cut versus two broadly expected) and emphasis on cutting rates “gradually”.
“We think it’s very likely that we’ll see another 25bps cut in November and possibly again in December, but our biggest conviction is the terminal rate of the cutting cycle, which we continue to believe should be lower, especially relative to what’s priced for the US and Euro terminal rates.
“It’s also worth noting the maintenance of £100bn of asset purchase run off, meaning active sales will decline in the coming year. This is somewhat positive versus expectations and we believe could help to support the longer end of the Gilt curve.“
George Lagarias, Chief Economist at Forvis Mazars, said:
“The Bank of England maintained rates despite a clear “green light” for more aggressive cuts after yesterday’s surprise 0.5% move from the Fed. Unlike its US counterpart, the British central bank is not quick to declare victory against inflation, despite facing significantly more restrictive economic growth conditions. Having said that, we would expect the Bank to pick up the pace in the next few meetings, as both the US and the ECB are on steeper rate cut cycles.”
