It wasn’t exactly a surprise to learn that yet again this month, the Bank of England’s Monetary Policy Committee (MPC) has decided to keep UK interest rates at their current level of 5.25%, for the seventh time in a row.
Ahead of yesterday’s UK inflation data, there were a few question marks for wealth managers around the timing of possible interest rate cuts. However, despite headline inflation hitting the Bank’s 2% target for the first time in almost three years, services inflation is proving to be the fly in the ointment. Coming in at 5.7% for the year to April, this is going to cause some concern amongst policy makers that they can’t cut too quickly in case they inflame the situation and see more long term inflationary pressures taking hold in the economy. Focus now shifts to the Bank’s next meeting in August.
So what does today’s interest rate announcement mean for wealth managers, for asset allocation decisions and investment portfolios? Investment and economics experts having been sharing their views with us as follows:
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services said: “The Bank of England’s rate-setters voted to keep the base rate unchanged at 5.25% today, despite the UK being one of the first major global economies to see inflation fall back to the 2% target level.
“Under normal circumstances, this feat would encourage the Bank to cut rates. However, the general election in two weeks’ time precludes the Bank from making moves that could signify political favour. Further, the Monetary Policy Committee (MPC) only has the main political parties’ manifesto pledges as an indication of Westminster’s objectives. Once the new Parliament is seated and a new budget is delivered, the trajectory for monetary policy will be made clearer.
“That being said, it is clear that a rate cut is on the horizon and, assuming inflationary pressures remain eased, it is likely there may be more than one. The Bank’s forecasts, last updated in May, project price pressures to remain subdued in the next three years. This signals that MPC members may focus increasingly on forward-looking measures of inflation, such as wage growth, when making policy decisions.”
Ben Nichols, Interim Managing Director of RAW Capital Partners, said: “Just two weeks before an election, it would have been very bold for the Bank of England to do anything other than hold the base rate today. Throughout the BoE’s rate hiking cycle, its mandate and decision-making have come under a great deal of scrutiny, and a rate cut this close to polling day could have landed the Bank in political hot water.
“What’s more, there remains a degree of economic turbulence as well, even if inflation did fall to the BoE’s 2% target yesterday. Last week’s labour market data exceeded economists’ expectations, while services inflation – a key gauge of underlying inflationary pressures – remains at 6% (May’s data – will adapt for the send but it’s expected to stay high). The Monetary Policy Committee has consistently stated that their decisions are data-driven, so these figures present another hurdle to a rate cut.
“We are close though; many economists now expect the BoE to cut rates in August. The election will have been and gone, giving the economy a month to stabilise before the stimulus which a rate cut provides takes effect. However, the cost of borrowing will remain comparatively high for some time and could potentially weigh on the performance of various asset classes, including property. As a result, we should expect to see investors continue to diversify their portfolios and look to the alternatives market to provide strong risk-adjusted returns.”
Andrew Summers, Chief Investment Officer at Omnis Investments, said:
“We didn’t expect the Bank to reduce interest rates today. This year’s upside surprises to inflation have been too many and yesterday’s print probably marks the low for this year, so the Bank will want to see further evidence that inflation has indeed been tamed. This is likely to come in the form of temperance in service sector and wage inflation, which we do expect will begin to emerge soon. Rate cuts are on the horizon, beginning possibly in August but probably by November.”
William Marshall, Chief Investment Officer at Hymans Robertson Investment Services (HRIS) says:
“With yesterday’s announcement that inflation was back at the Bank of England’s 2% target, people are probably wondering why the BoE hasn’t started cutting interest rates. A month ago, an interest rate cut at today’s meeting looked to be on the cards.
However, the April inflation data more or less ended hopes of that even before yesterday’s data, despite a large drop in headline CPI. This is because the decrease was already expected owing to the fall in the energy price cap. Other measures of inflation, like Core and Services inflation, which can give a better indication of domestic price pressures, don’t look so positive.
Core inflation, which excludes volatile items like food and energy, is still at 3.5%, while Services inflation has only fallen 0.3% to 5.7% over the last two months. The BoE won’t necessarily wait until Core and/or Services inflation is back at 2%, but they will want to see more evidence that it is on a sustainable path towards target.
“Recent labour market data also showed persistence in high wage growth which will sustain services inflation. However, a large part of the April data will reflect the 9.8% increase to the National Living wage, meaning wage growth may fall in the near future to levels more consistent with 2% inflation. The BoE will be looking for signs of this when considering a rate cut at the August meeting.
“The prospect of near-term interest rate cuts increases the attractiveness of bonds (where higher rates can be locked in) over cash for investors.”
Robin Rathore, CEO, Bamboo Auctions, said:
“Holding the base rate today is a prudent decision both economically and politically, particularly as we get closer to the general election date. Any move either way at this time could have led to doubts about the impartiality of the Bank of England and raise some serious questions.
“Now inflation is at target, it is likely that the Bank of England will now follow the moves made by the Central European Bank and other major economies – from August it’s likely that we will start to see gradual base rate drops over the next 12 months to ensure inflation remains steady.
“The good news is that despite the economic and political uncertainty of the last few months, the property market is now seeing more activity, with green shoots of positivity, confidence starting to return and momentum increasing. Our estate agent partners have been experiencing a 20% increase in new property instructions over the last month and buyers are returning into the market in earnest.”
Georgina Hamilton, Fund Manager of the Polar Capital UK Value Opportunities Fund, said:
“Headline data on inflation has now come back to the Bank of England’s (BoE) 2% target and should stay there for the rest of the year, however service inflation has remained stickier. We now have clear signs of softening in the labour market and the effects of the hike in the National Living Wage working their way through the economy.
“Core inflation should start to show progress, paving the way for the BoE to clearly signal to the market their next move is to cut, likely in August. Today’s move certainly signals one thing – the BoE wants no surprises when they actually do cut. They will want sterling to remain calm over the rate cuts, but will no doubt take comfort from the FX market’s reaction to other central banks cutting rates. From our own conversations with housebuilders and consumer-exposed stocks, we know many consumers are waiting for an actual move in rates before making bigger spending decisions.
“While there has been a great deal of focus on the BoE cutting rates ahead of the Federal Reserve – which is unusual – we feel the more interesting debate is where UK interest rates end up. Currently, the market is pricing UK rates to fall to 3.5%, similar to the US rate curve; interestingly, the Eurozone is over 1% lower at 2.4%.
“Given the improvement in outlook for inflation we feel rate expectations have room to improve further in the UK which should be a more beneficial backdrop for small and mid-cap stocks.”
George Lagarias, Chief Economist at Mazars, said:
“It comes as no surprise that the Bank has maintained interest rates. Despite inflation reaching the 2% target, Bank officials acknowledge that some data, possibly services inflation, remain too high for comfort. We believe it is still very likely that the UK will begin rate cuts this year. But it will take a decisive plunge in wage inflation to turn sparse cuts into a persistent rate cut cycle.“
Tim Graf, Head of EMEA Macro Strategy at State Street Global Markets, said:
“There were no surprises from the result or the vote, but today’s Bank of England decision and accompanying commentary are meaningful in bringing an August cut more into frame. Noting that the decision to cut rates was ‘finely balanced’ for some voters implies at least a handful of MPC members are close to changing their vote to a cut.
“Given the weakness emerging in the labour market, the June CPI data, released 17 July, and payroll data, released the following day, likely determine whether that first cut comes in August or September.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley), said:
“That the Bank of England wasn’t going to cut interest rates today was widely expected. After all, some underlying measures of inflation, such as the core metric stripping our volatile components such as energy and food, and inflation in the services sector more generally, remain elevated, and could rise further if rates were cut too soon. The Bank also wasn’t expected to adjust policy prior to the election on July 4.
“The interesting bit was perhaps that for some policymakers the decision in June was finely balanced, as they saw the higher-than-expected service inflation as reflective of factors that wouldn’t necessarily push up medium-term inflation. In our view, all this is likely to increase odds of an interest rate cut in August.
“We’ve been saying for some time that UK inflation was on course to hit the Bank of England inflation target. Yesterday’s figures put headline inflation precisely at 2%, from a peak of over 11% in October 2022. Of course, the Bank would want to see more evidence that this isn’t just a blip, and we think it will.
“After the first quarter-percent rate cut in August, we expect at least an extra cut this year, and then a series of further rate reductions to bring the Bank rate down from its current 5.25% to around three and a quarter percent at end-2025.”
Rob Clarry, Investment Strategist at wealth management firm Evelyn Partners, said:
“After three years of elevated inflation, the Bank finally hit its 2% inflation target this week. However, it remains too early for the Bank to take a victory lap and start cutting rates. While the headline figure looks promising, under the bonnet things are more complicated.
“Services inflation, which is seen as a better gauge of domestic inflationary pressures than the headline figure, remains far too high at 5.7%. Similarly wages, which are a crucial input to the services sector, were reported to be growing by 5.9%. Both figures have surprised to the upside in recent months and are inconsistent with the 2% inflation target.
“This comes amidst growing weakness in the UK labour market. The unemployment rate has increased to 4.4% from 3.8% in November. While the number of vacancies available has continued to decline. The risk for the Bank is that they continue to set policy based on lagging data (i.e. inflation and labour market data) and maintain restrictive policy for too long.
“The growth data continue to look solid, if unspectacular. The Composite Purchasing Managers’ Index, a barometer of economic activity, printed 53 for May signalling growing output. But despite the deceleration in inflation, prices are still 20% higher than three years ago, which will continue to strain household finances.
“Markets appear to have taken the communications from today’s meeting as a sign that rate cuts are close. Interest rate sensitive sectors, such as housebuilding, rallied. While money market traders now assign a 60% chance of an August rate cut, up from 30% yesterday. The next month of data will be crucial.”
Ross Barr, Senior Multi-Asset Strategist at Cardano, said:
“Today’s Monetary Policy Committee (MPC) decision to maintain interest rates at 5.25% was very much in line with market expectations and given we are in the middle of a General Election campaign.
“While headline inflation fell to match the Bank’s 2% target this month, we continue to expect the Bank to move cautiously. Services CPI, a key point of focus for the Bank, remains elevated and sticky. We do however expect underlying inflationary pressures to ease gradually through the year and for the Bank to start cutting rates in August.
“The overall tone of the MPC’s statement is consistent with this view. Notably, the Bank observes that “[…] developments since the previous MPC […] informed the assessment that the risks from inflation persistence were receding.
“Current polling suggests a strong likelihood that the next government will be formed by the Labour party. The Labour party’s manifesto pledges are exceedingly cautious with respect to fiscal policy – this is to be expected given the very limited scope that any incoming government will have to deliver expansionary fiscal policy given the UK’s net debt rule.
“We expect some support for the UK’s growth outlook to come from supply-side measures, notably the Labour party’s intention to pursue a more favourable trade relationship with the European Union.
“The overall outlook for the UK economy is modest; we continue to expect to see only a shallow recovery to continue through this year and into 2025. Market consensus has moved towards our long-standing cautious view. The onus may well fall upon monetary policy to support the UK economy as recovery progresses into next year, with the Bank highlighting that monetary policy settings are presently restrictive and would remain so even if interest rates were to reduce.“
Luke Bartholomew, Deputy Chief Economist, abrdn, said:
“The fall of headline inflation back to target was expected, but will still come as extremely welcome news to the Bank of England. The big question now is whether underlying inflation pressures in the economy are consistent with inflation staying around 2% in the medium term, or whether inflation will start to edge higher again once favourable base effects fade.
“On that front, there is still evidence of residual stickiness in services inflation, reflecting the strength of wage growth recently. That is why an interest rate cut tomorrow is still very unlikely. But we think the Bank’s communication tomorrow will set out a path for a cut in August, which is now looking increasingly likely.”
