UK interest rates have been cut today by the Bank of England for the first time in 4 years. Good news at last!
Following the welcome news that headline UK inflation had – at long last – fallen to the Bank of England’s target of 2% in the year to the end of May, hopes and expectations were set high that today’s meeting of the Monetary Policy Committee would lead to UK interest rates being cut by 0.25% from the previous rate of 5.25%.
However, today’s was clearly a knife-edge decision for the MPC. This was mainly because services inflation has remained stubbornly above target, giving concern that this might fuel the inflation fire, and lead to the headline rate resuming an upward path in the months ahead. Clearly a tricky balancing act for the Bank, not wanting to cut too early and risk the inflation spiral returning but wary that if things are slowing, then a time lag exists before a rate cut can impact the underlying economy
Investment strategists and economists have been sharing their reaction to today’s interest rate news, on what it means for the economy, for investment markets for businesses and for consumers as follows:
Tomasz Wieladek, chief European economist at T. Rowe Price said: “The Bank of England (BoE) cut rates by 25bps today, with the monetary policy report focusing on the increasingly bimodal nature of the risks facing the UK inflation outlook. The Monetary Policy Committee (MPC) highlighted the call was finely balanced – inflation risks were skewed to the upside and the forecast did not reflect the recent public sector wage settlements.
“Only five MPC members voted for a cut. However, the modal inflation forecast shows a 1.5% rate of inflation three years out, which is a dovish signal. The forecast implies the BoE would have to cut rates by more than current market pricing. The MPC also dropped any references to services inflation from the monetary policy summary. This suggests it will put less emphasis on services inflation as an indicator of underlying inflation and put more weight on the forecast.
“The discussion continues to highlight the very bimodal distribution of risks. The BoE provides arguments that were both dovish and hawkish in its discussion of the economic outlook. Overall, the BoE is trying to signal it would like to cut again, but decisions will remain data-dependent, given all of the possible future risks to inflation.
“My view is the MPC will cut again in November. What happens after this will depend on the path of fiscal policy, but given the timing of the budget on 30 October, the fiscal policy path will only be updated in the February 2025 projection.
“The BoE also made a bold statement on quantitative tightening (QT). It published a box on QT saying the effects of the policy are small. This means any contractionary effects of QT will not affect the transmission of interest rate cuts much. This is a signal saying the BoE will continue with £100bn worth of QT at its September meeting.
“How can the BoE be so confident the effects of QT are small? There are references to internal work by its economists suggesting QT has had only a small effect in event studies. It also says that although term premia rose by 75bps in its models over this time period, QT had only a small impact on term premia.
“However, the analysis does not mention a key mitigating factor of the macroeconomic effects of QT – the large rise of foreign official sector buyers in the gilt market over the past two years. From the start of QT to the end of 2023, foreign official authorities raised the share of gilts owned by as much as 5.2%. Large-scale official sector purchases, even by foreign authorities, reduce the amount the private sector needs to absorb. The effects on gilt yields are therefore smaller. The UK is an international outlier here, as foreign authorities reduced the share of other major bond markets during this period. The share of gilts the private sector needed to absorb has fallen from 9% to 4.5%. This has reduced the effects of QT by roughly 60-70%.
“This will likely change going forward. Foreign sector official purchases are already at a high level relative to the past decade. A further rise is therefore unlikely. Therefore, we will only see the full effect of BoE QT going forward. The effect of QT will likely be much stronger in the next two years than in the past two years.”
Benjamin Jones, Director of Macro Research at Invesco said: “The Bank of England voted 5-4 to cut its base rate, but the comments from Governor Bailey in the press conference suggest we should not expect a series of steady cuts in the coming months. This cutting cycle is likely to be shallow with intermittent rather than regular cuts as inflationary pressures remain a clear and present danger.
“In the press conference Governor Bailey commented that measures of services inflation that excludes volatile elements offer a better guide to inflationary pressures. That is a nod to recent strength in hotel prices that have been attributed to spikes in demand around Taylor Swift concerts. The BoE is right to look through some of those factors in our opinion but strength in other parts of the services space, such as package holidays, are less sensitive to one off events. Inflation there is likely to remain sticky even if this rate cut means some households will see a small drop in their interest income in the coming months.
“The BoE updated its inflation forecasts at this meeting, but you’d be hard pressed to see any change in the charts. Its forecast for a rise in headline inflation into year end before drifting lower in 2025 remains their base case. All in all, this was a hawkish first cut from the BoE.”
William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says: “Today’s decision from the Bank of England’s Monetary Policy Committee to cut interest rates would have been a close call. Yes, the headline inflation figure is back at the BoE’s 2% target, but there is still a bit of doubt around the sustainability of low inflation.
“The main drivers of falling inflation has, so far, been lower food and energy prices. The more domestically focused measures of inflation, like core inflation and services inflation, are still at 3.5% and 5.7% respectively and remained level in the June data. Now that energy and food inflation has little left to fall (energy bills are expected to increase this autumn) the headline figure will likely start to rise over the next few months.
“That being said, the labour market is showing signs of loosening, with wage growth slowly, but consistently, falling and unemployment rising. The BoE has also pointed to other labour market measures implying that there is now less of a concern around the risks of a wage-price spiral.
“The 0.25% cut today continues to leave the BoE in restrictive territory – still with its foot on the economic brake, but just to a lesser extent than before. This helps to justify a small cut to rates. We expect the BoE to continue to cut at a slow pace until confidence grows that inflation is persistently around the 2% mark.”
| George Lagarias, Chief Economist at Forvis Mazars comments: “It appears that the Bank of England is finally prioritising growth over inflation. Headline inflation in the UK is already at the 2% target but services inflation remains stubbornly high at 5.7% in June, meaning a cut was never a certainty and the 5-4 in favour of cuts shows this. “However, we do still expect the BOE to cut rates by another 0.25% this year, probably in November. The decision to ease financial conditions should probably have been taken in June given the weakness of the economy, but the election was likely the reason why the Bank decided to delay the announcement until August.” |
Andrew Summers, Chief Investment Officer at Omnis Investments, comments: “The BoE decided to reduce bank rate from a 16-year high of 5.25% to 5.00%. It was a close call with 16bps of cuts being priced ahead of the meeting. Whilst there had been a strong services inflation print recently, forward-looking indicators suggest that there is downside risk to Services inflation in the coming months. For example, Homelet and RICs surveys suggest there is downward pressure on the Rents for Housing component of CPI. In addition, unemployment is rising and job vacancies are slowing, which should drive wages lower from here. Our expectation is that the Bank will lower rates further at the September meeting and ultimately more cuts will be delivered than what is currently discounted by markets.”
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), says: “This is a modest but symbolic cut. Although the decision to cut rates was finely balanced, it signals a turning point in the rate cycle.
“With the potential for further cuts to come, this move is likely to add fuel to the recovery we are already seeing in the investment trust sector and the market more broadly. The average investment trust discount, excluding 3i, has narrowed from its nadir of 19% last October to 13%, and if today’s rate cut is the first of a series, we may see this narrow further as yields and returns will look increasingly attractive.”
“Lower interest rates could see investors looking beyond fixed income and towards alternative asset classes such as infrastructure, renewable energy and property, which have the potential to pay attractive levels of income. A lower Bank of England base rate could also boost income-paying investment trusts such as our dividend heroes, which have delivered consistently rising dividends for periods of at least 20 years.”
Rob Morgan, Chief Investment Analyst at Charles Stanley reacts: “Today’s BoE interest rate decision was always going to be a close call and so it proved. Ultimately the balance of the rate setting committee at the BoE opted to make a cut for the first time in over four years.
Looking at the inflation data there is perfect logic to this. Following almost three years of above-target rises, inflation has fallen to 2% in the past two months, and this more subdued picture overall was enough to convince the balance of voting members of the MPC the coast is clear to start the rate cut journey.
However, the benign façade of headline inflation masks more complex and concerning trends. Almost all the heavy lifting has been done by falling goods prices, while in services the inflationary embers continue to burn and this could mean further cuts are limited.
Services inflation has remained stubborn thanks to sensitivity to robust wage increases, and both are rising at an annual 5.7% according to the latest readings. Until these embers show signs of dying out more concertedly the BoE is going to have a problem justifying more significant rate cuts.
While wage pressure could ease, there are also risks they could re-accelerate. Public sector workers have recently been granted pay rises, while the 9.8% increase to the living wage in April continues to inflate the year-on-year numbers. Meanwhile, although wage pressures could ease further, there are also risks they could re-accelerate as public sector workers are granted pay rises and increases to minimum wages in the spring inflate the year-on-year numbers.
Economic growth has also been a little stronger than anticipated, adding to the inflationary brew and the likely reticence of MPC members to make more significant cuts. GDP grew by 0.7% in the first quarter of this year, or 2.8% annualised, as the economy rebounded from a mild recession in the second half of 2023. Consumer confidence has so far held up despite the rapid increase in interest rates, and policymakers will not wish to risk a fresh resurgence in household spending rekindling price rises.
Many households and businesses will be hoping for further interest rate cuts, which would more significantly relieve pressure on those with variable rate mortgages in particular. However, cuts will only be fine tuning rather than deep, owing to the stickiness of inflation and wage growth. It will therefore be a case of continuing to battle against high borrowing costs relative to recent history.
Overall, following today’s more we will likely see a shallow trajectory of cuts, perhaps at a roughly quarterly pace, towards the 4% level next year. There could be a faster cutting cycle only if growth disappoints or inflation becomes more firmly subdued, which looks unlikely.”
Lindsay James, investment strategist at Quilter Investors comments: “The Bank of England has finally spotted its opportunity to cut interest rates and has enacted its first reduction since the onset of the pandemic today. This will bring a huge collective sigh of relief to consumers and businesses up and down the country after interest rates reached the highest level in 16 years.
“With the market having been on the fence ahead of the announcement, with a 66% chance of a quarter-point cut, in the event the decision by the MPC was indeed a very close thing with a 5-4 majority decision. The Bank of England is making it clear to everyone this will not be a speedy journey on the way back down as it does not want to cut too quickly or by too much and risk a fresh inflationary spiral.
“In recent months inflation has eased its path from a headline rate of 4% at the start of the year down to 2% presently, although it is expected to rise back towards 3% as the year progresses and the benefit of lower energy costs compared to a year ago becomes much reduced. Core inflation, which strips out volatile energy and food price movements, has been more stubborn, remaining at 3.5% for the past two months. The partly reflects structural challenges in the UK labour market that will require a more complex government-led solution to address the significant extent of economically inactive people, who dwarf the unemployed by a ratio of six to one.
“Despite the headwinds that the UK economy has faced, there is an air of optimism that has for some months been desperately lacking, even if further cuts may not necessarily be as speedily forthcoming as some might like. Whilst the Treasury appears keen to ‘kitchen sink’ the UK finances ahead of a tax grab in the Autumn, the new Labour government is acutely aware that in order to remain in power they must not only address the legacy they have inherited but also deliver growth whilst acting with a sense of urgency in order for the electorate to not only feel better off by the next election cycle but also to avoid further gains for Reform. So far, this approach has been viewed reasonably positively by investors, who have first and foremost welcomed the stability a new government has offered, particularly in relation to Europe and the US where power struggles continue. However, the likely cuts to public services, paired with inevitably higher taxes by the Autumn, mean that as ever, the devil will be in the detail.”
Indriatti van Hien, Fund Manager at Henderson Small Companies Investment Trust comments: “The Bank of England’s decision to cut rates by 25bps to 5% today is welcome news for the UK economy and stock market. Whilst nominal in absolute terms it is a meaningful milestone in the direction of travel for monetary policy should add to the already building momentum in UK business and consumer confidence.”
Comments from Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley): “In line with our long-standing expectations, the Bank of England cut rates today.
Prior to this monetary policy meeting, markets were uncertain, assigning a probability of about 60% to a rate reduction. This is also reflected by the fact that the decision to cut was a narrow one, with five votes for a cut versus four for leaving rates unchanged.
The important point is that inflation in the UK is now at the 2% target. Keeping rates too high for too long would have caused unwarranted economic weakness and therefore, an undershoot of the Bank’s inflation mandate to the downside.
Even though it makes sense to proceed at a moderate pace, beginning to soften the degree of monetary tightening looks like the most sensible approach.
For quite some time, we’ve been underweight UK gilts in the ‘balanced’ portfolios, those with a mix of equity and fixed-income exposures.
It wasn’t clear when the Bank of England was going to cut interest rates and, if one really wanted to increase fixed-income exposure, European investment-grade corporate bonds offered more compelling yields.
More recently however, we’ve increased our exposure to short-dated gilts. This is because short-dated bonds are most sensitive to central bank rate changes.
With the Bank of England having just cut rates and likely to continue to do so, one-to-three-year gilts could benefit, as prices rise when yields fall.”
Jeremy Batstone-Carr, European Strategist at Raymond James comments: “Today’s decision to cut the base rate shows that the Bank of England’s Monetary Policy Committee remains deeply divided on its outlook regarding inflation. Headline consumer prices have sat steady at the Bank’s 2% target for two months, but there remained concerns around wage growth and service sector price pressures.
The UK’s economic performance has been stronger than expected in recent months, moving past the residual effects of earlier inflation and providing an economic boost for the newly installed Labour government. However real interest rates remain high and there has been a stronger-than-expected strengthening in demand over potential supply constraints, notably in the labour market. Despite this, the Committee has taken a leap of faith in cutting rates, hoping to stimulate consumers with lower borrowing costs and increased spending power.
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management(JPMAM) says: “It has been over two and a half years since the Bank of England first embarked on its hiking cycle, so households will understandably be pleased to hear that rates are now heading in the opposite direction. In recent months, the Monetary Policy Committee has been divided on whether underlying inflation pressures have fully subsided, but with headline inflation back at the 2% target for two consecutive months, the Bank likely saw this as too tempting an opportunity to turn down to take its foot off the brake.
The optics around further rate cuts could become more challenging, however, with headline inflation likely to pick up again later in the year as favourable energy base effects fade. This, coupled with ongoing resilience in economic activity, and the implications of recently announced public sector settlements on wage growth more broadly, will likely temper how quickly rates are cut going forward. Absent a material growth shock, this cutting cycle is likely to be relatively gradual, with a quarterly cadence seeming plausible.”
Luke Bartholomew, Deputy Chief Economist, abrdn, says: “Today’s monetary policy decision always looked like a finely balanced judgement. And so it proved, with policymakers very divided, and the smallest possible majority voting in favour of a cut. Attention will now turn to how far and how quickly interest rates will fall from here. The Bank’s signalling talks of the risk of cutting “too quickly”, but its own forecasts imply that inflation will come in well below target in a couple of years if interest rates follow the path currently priced into markets. This might be a signal that the majority of policymakers are expecting to cut more than the market currently forecasts. We tend to agree with that assessment, and expect rates to fall further over the next six months. But ultimately it is the data that will determine how interest rates evolve from here, with the Bank hoping its conviction that underlying inflation pressures are fading will be vindicated.”
Isabel Albarran, Investment Officer at Close Brothers Asset Management, says: “Borrowers across the country will no doubt be breathing a sigh of relief today following the Bank of England’s decision to cut interest rates from 5.25% to 5%. This move marks a key milestone for the central bank that hasn’t cut rates since 2020, signalling a significant shift in policy.
“That said, it was a knife edge decision, with five MPC members voting in favour, and four favouring no change. With UK GDP data reviving, services inflation still remaining sticky, and wage growth still stronger than hoped, we caution investors against expecting aggressive further cutting and wouldn’t be surprised if rates continue to be kept higher for longer.
“While rates have been reduced, they remain in restrictive territory. Today’s forecast indicates that the current market path for rates should see inflation below 2% by 2026, but remaining elevated through much of next year.
“Looking forwards, while we do expect at least one more cut before the end of the year, the timing of this will largely depend on how factors including underlying inflationary pressures and labour market data evolve.”
Tom Stevenson, Investment Director, Fidelity International, comments: “The Bank of England has pipped the Federal Reserve to the post, cutting interest rates after a knife-edge decision that saw a 5-4 split on the Monetary Policy Committee. The 0.25% reduction in interest rates to 5% is the first cut in the cost of borrowing since the pandemic and follows a year in which rates have been held at a 16-year high of 5.25%.
“The Bank’s commentary confirmed the challenge it has faced in deciding whether to cut rates. Although inflation has been at its 2% target for two consecutive months, the Bank said it expects it to rise to 2.75% in the second half of the year. On growth, while GDP has risen quite sharply this year, the Bank recognised that underlying momentum is weaker. The US central bank held interest rates at between 5.25% and 5.5% last night, but indicated that if inflation continues to moderate in line with expectations it will also cut at its next meeting in September.
“The Bank’s move towards easier policy has already triggered some reductions in mortgage rates and activity in the housing market has started to pick up in anticipation of cheaper loans. Nationwide said today that house prices had risen for the third consecutive month in July.
“Stock markets have welcomed the interest rate pivot. In the past week, the FTSE 100 has risen by 2.6% to within a whisker of its all-time high of 8,446, struck in May. Falling interest rates reduce the attraction of holding sterling assets, however, and the pound has given up some of its recent strength against the dollar. After the announcement, it traded at $1.2778. down more than 0.5% on the day. The pound briefly topped $1.30 a month ago. The yield on government bonds fell below 4%, as investors anticipated further cuts in interest rates to come. The 10-year bond yields 3.95%, down from the peak of 4.75% last summer but still higher than the 3.43% low hit in December.
“Investors will be considering how to adjust their portfolios following today’s cut in interest rates. Fidelity investors have recently favoured a bar-bell approach, investing in both high-growth global technology funds but also defensive money market cash funds. While cash rates are likely to fall from their current levels, they remain high by recent historic standards. At the same time the stock market has seen a significant rotation out of the technology stocks that have led the market higher and into previously out of favour smaller companies.”
Charles Ambler, Co-Chief Investment Officer at Saltus says: “The interest rate cut by the Bank of England (BOE) today isn’t a surprise as the market has been varying around the 50:50 mark since the latest inflation figures.
“At Saltus, we have global exposures across asset classes, and we expect to drive returns over and above the UK cutting its base rate. However, our portfolios have more exposure to government bonds now than they have for several years, and within the last few months, we have been moving our exposure from US Treasuries to UK Gilts.
“Whilst we don’t have a crystal ball, we think the relative inflationary pressures are easing faster in the UK, giving the BOE more of an ability to cut interest rates, so we would expect bond yields to fall and their corresponding prices to rise from their recent historic lows.”
Tim Graf, Head of Macro Strategy, EMEA at State Street Global Markets on today’s Bank of England interest rate decision reacts: “The narrowness of today’s vote to cut rates and accompanying commentary highlight how deliberate the easing process will remain for the Bank of England over the remainder of 2024. In meeting market expectations for a cut but sounding relatively hawkish, we would expect any follow-on weakness in sterling to be limited. To this end, the institutions we track in our flow metrics have been strong buyers of the pound in recent weeks. Lower rates challenge these flows somewhat, but sterling still enjoys a yield advantage against most G10 currencies and we do not see this as too dovish an innovation to challenge those flows.”
Daniela Sabin Hathorn, senior market analyst at Capital.com says: “The Bank of England has cut rates by 25 basis points. The call was pretty close, with a 61% chance of a 25bps cut priced in just moments before the decision was announced. The vote split of 5-4 shows how close it was, even for the MPC members. Members Pill, Greene, Mann and Haskel voted to keep unchanged at 5.25%. Their justification is that inflation persistence has not yet dissipated.
The statement accompanying the decision highlights how finely balanced the decision was. The comment about how “The risks of higher inflation remain. We need to make sure inflation stays low. So, we have to be careful not to cut interest rates too much or too quickly.” stands out as it offers some caution within the cutting cycle. Like the ECB, the BOE does not want to set a pre-determined rate path, opting to keep further decisions data dependent.
With regards to economic projections, the central bank has revised higher the inflation projections for the remainder of 2024 and the first half of 2025 but has revised lower the longer-term forecasts. The bank also expects the economy to start slacking as GDP growth slows and unemployment rises. This, coupled with the risk of inflationary pressures from second-round effects, is what the central bank will continue to monitor closely in order to avoid a stagnant economy.
For now, markets are pricing in a 50-50 chance of another cut in September, but it’s likely that we see a big more caution priced in over the coming days as more data evolves. The messaging from the BOE seems pretty clear with regards to wanting to avoid cutting too quickly, so like the ECB they may take a breather for one meeting before potentially cutting again. Therefore, a November cut is looking like a safer bet, but markets will have to wait and see how the UK CPI, GDP and jobs data comes in over the coming weeks. For the remainder of 2024, current pricing shows 40 bps of cutting.
UK assets had been struggling to find momentum heading into the meeting but the decision to cut rates has given a mixed reaction, as expected. The FTSE 100 welcomed the easing of policy with the recent bullish drive gaining further momentum as it improves the future earnings potential for UK companies. In the meantime, the British pound and UK yields dropped following the decision, as the rate differential plays against them, especially when compared to the US dollar as the Federal Reserve kept rates unchanged on Wednesday.”
GBP/USD 1-hour chart
FTSE 100 1-hour chart
Past performance is not a reliable indicator of future results.
Joaquin Thul, Economist at EFG Asset Management, the asset management arm of EFG International, a global private banking group headquartered in Zurich, Switzerland comments: “In a narrow vote, MPC members voted by 5 to 4 in favour of cutting the official bank rate by 25bps from 5.25% to 5.0%. Interest rates had remained at a 16-year high since August 2023, when the BoE ended a series of eight rate hikes in response to high levels of inflation.
“This decision was supported by weaker economic data since the last MPC meeting in June. In particular, softer services inflation and a loosening in labour market indicators gave BoE officials sufficient evidence that inflationary pressures have been abated, warranting an easing of monetary policy. Although the month-on-month decline of services prices and wages have not been as pronounced as some members would have expected, the broader perception is that inflationary pressures have receded since the start of the year. MPC members highlighted that the normalisation in inflation expectations will continue to feed through into a further deceleration in wage growth later in the year. Additionally, the impact from past external shocks seem to have receded, but the restrictive stance of monetary policy will continue to affect economic activity in the coming months.
“The BoE maintains that base effects in energy prices will continue to impact inflation in the coming months. As a result, the BoE still expects inflation to rise to 2.75% in the second half of the year, reflecting the persistence of domestic inflationary pressures.
“In recent years BoE officials have been cautious on their assessment of the UK economy, with their own growth forecasts for the coming four years sitting below market consensus expectations. Therefore, it would be expected they will continue to tread with caution in the coming months, following a slow pace for easing monetary policy. For the time being, the MPC reiterated that rates will need to remain restrictive enough to ensure inflation stays at the 2% target and that further policy decisions will remain dependent of upcoming economic data.”
Laura Foll, co-fund manager at Henderson Opportunities Trust, Lowland and Law Debenture, said: “This was a difficult decision for the market to price ahead of time, because the election had put a cap on smoke signals being broadcast from the Bank of England.
“With core inflation down to 2% for two months consecutively, pressure was mounting for this cut. But inflation stickiness on the services side and wage inflation still running at around 5.5% had left room for doubt over the decision.
“It’s important not to overstate the effect of a small interest rate cut on the broader UK economy, but it sends a welcome signal to households and businesses that the direction of travel for interest rates is downwards.
“Many households are struggling, but on average UK consumers have built a healthier balance-sheet position over the past decade.
“The signal that rates have peaked might encourage some to start spending again, which would be good news for many smaller and mid-cap UK companies dependent on consumer spending.”
Katharine Neiss, chief European economist at PGIM Fixed Income says: “It was not a high-conviction call, but the Bank of England (BoE) delivered the expected rate cut, bringing the bank rate down to 5%. An updated forecast pointing to even lower below-target inflation at the end of the forecast horizon – together with the fact inflation is currently at 2% – gave it the confidence to adjust the peak rate now. That said, the BoE warned inflation is expected to pick up close to 3% later this year. This suggests a further rate cut may not be on the cards for September – in contrast to other major central banks such as the Federal Reserve and the ECB, where September cuts look likely. We could see one more cut this year, likely in November, assuming no fiscal bazookas are announced in the October budget.”
Ross Barr, Senior Multi-Asset Strategist at Cardano, comments: “Today’s interest rate cut was in line with our expectations albeit, ahead of the decision, there was no clear consensus evident in market pricing as to how the Bank of England’s Monetary Policy Committee (MPC) would act. The MPC’s decision was not unanimous. Four dissenting voters preferred to maintain rates at the 5.25% level. The gilt market, which had been rallying over the past 2-3 days, was little changed on the news.
“The Bank continues to finely balance the progress that has been made in slowing inflation over the past 18 months with the lingering threats that persist. Notably, service sector inflation is still elevated, the labour market is tight and wage pressures continue. The Bank continues to forecast a small rise in inflation during the remainder of the year as a result of year-over-year energy prices comparisons, however, this base effect has not dissuaded the majority of the MPC from voting to cut rates today.
“In contrast, yesterday the Federal Reserve maintained their policy rate at 5.25%-5.50%. Chairman Powell drew attention to weakening in US labour markets and suggested that a rate cut may be forthcoming in September so that they can stay in line with their dual employment / inflation mandate.
“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. At present, the Bank continues to highlight that monetary policy settings remain restrictive and would remain so even if Bank Rate were to reduce further.”
David Zahn, Head of European Fixed Income at Franklin Templeton said: “The Bank of England cut rates to 5% today in a split decision. This is the start of an interest rate cutting cycle that should see interest rates move back towards 3% in the UK. This should be very supportive for UK Gilts across the curve, and we would maintain a long duration position in UK Gilts. The inflation forecasts for 2026 and 2027 are both below the BOE target of 2% further reinforcing that the MPC should continue to cut rates in the coming year. The impact of Sterling should be rather muted as the BOE is moving with the ECB and Fed anticipated rate cuts. The potential major distraction to the BOE cutting rates further will be from the UK budget announcement at the end of October. If that comes in as expected, the BOE will have clear support to continue rate cuts into 2025.”
Commenting on the BoE move and market reaction, Peter Goves, Head of Developed Market Debt Sovereign Research of MFS Investment Management said: ‘The gilt market rally on the BoE is justified and understandable. The first cut in this cycle was not fully priced but was consistent with the Bank’s narrative that inflation persistence is waning and that restrictive policy is likely to weigh on demand. Guidance indicates that rates will need to remain restrictive for “sufficiently long” to ensure inflations gets to target sustainably over the medium term. This implies that the BoE is not on urgent path to neutral any time soon. We can therefore expect a rather gradual path in policy normalization pending the data. Overall, this keeps us constructive on gilt yields with a steepening bias on the curve.’
Sharing his reaction to today’s news, James Lynch, fixed income investment manager at Aegon Asset Management said: “Given the market had 16bps of cut going into the meeting, whatever they did was going to be a bit of surprise. This comes after 12 months of policy on hold from the last hike in August 2023.
‘Given this is the first move lower in policy rate the natural questions to ask is how fast are the BoE going to cut and how deep? The answer is we still don’t know, however Governor Andrew Bailey made the point to say that we must be careful not to cut too far or too quickly. They appear to be moving away from dissecting the data, i.e private sector wages ex bonus and services inflation to looking a bit more big picture ‘frameworks’ that the economy is in of which different members of the MPC attach different weights.
‘This was not a press conference where the BoE were laying the ground for a series of rate cuts or indeed a cut at the next meeting in September. It was still a meeting by meeting, data dependant forward guidance. This means we would not expect a cut at the next meeting in September but in November which the market has already fully discounted.’
