With UK inflation data yesterday revealing a better than expected figure of 3.4% to the end of February, its lowest level for over two years, and sharply down from its peak. It put some pressure on the Bank of England’s Monetary Policy Committee (MPC) who had much to consider at their meeting today – but they clearly resisted the temptation to start easing just now deciding to keep rates on hold.
The market had been fully expecting that the Bank of England (BoE) would keep UK interest rates unchanged at 5.25% – a sixteen year high level. The Bank of England had been clear in statements in recent weeks that it will be looking to a sustained fall in inflation to its target level of 2% before it would be confident enough to start cutting rates. The big question on the minds of wealth managers is when such cuts are likely to happen and how sharply any subsequent cuts might follow in a quest to boost the economy.
With Governor Andrew Bailey set to make his statement later, wealth managers will have a clearer idea of the Bank’s thinking and of when they might begin to reduce rates – with the impacts on stock and bond market moves that are likely to hang on such decisions.
Investment strategists, economists and wealth managers have been sharing their reaction to this latest interest rate news from the BoE as follows:
Bank of England holds the line, but rate cuts likely to come by summertime says Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments:
“As widely expected, the Bank of England’s Monetary Policy Committee (MPC) has decided to hold the UK’s base rate at 5.25% for the fifth consecutive time. Despite favourable economic conditions, including a dip in consumer prices, the Bank has retained its precautionary stance for the time being.
“Nonetheless, the Bank has signalled that it will not wait for inflation to hit the 2% target before commencing the rate-cutting process. This may however take a couple more months of favourable data, as the Bank will only begin to cut rates once it has sufficient confidence that prices are falling on a sustainable basis.
“The next MPC meeting will take place on the 9th of May, by which point rate-setters will have seen CPI data for March, but not April, and February’s employment and wage figures. In the following meeting, on the 20th of June, the Committee is more likely to have substantial evidence of dissipating price pressures and a robust understanding of the extent to which the UK economy has emerged from its shallow recession.
“Although it is hard to foresee exactly when, rate cuts are coming. This should enable households and businesses to plan for the future with greater confidence than has been afforded in recent years.”
Richard Garland, Chief Investment Strategist at Omnis Investments, said:
“Despite the recent sharp fall in core inflation it is still too soon for the Bank of England to consider cutting interest rates. Wage growth and service sector inflation are both still too high and sticky for comfort. They are moving in the right direction however, which means that a new cycle of interest rate cuts should emerge in the summer.”
Pieter Staelens, Managing Director at CVC Credit and Portfolio Manager of CVC Income & Growth, said:
“The Bank are right to hold rates at their current levels. While the latest data is positive, we still see a number of inflationary pressures on the horizon – including ongoing conflicts, geo-political flux and labour shortages – so we’re not out of the woods just yet.
“Headline inflation is definitely coming down, but core CPI remains too high for the BoE to be comfortable in cutting rates. We’ve learnt how quickly the inflation picture can change, and the Bank should hold off on cuts until they’ve more visibility on achieving their 2% target.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“As had been expected, the Bank of England has once again followed in the Federal Reserve’s footsteps with a further hold on interest rates. Eight of the Bank’s nine policymakers voted to hold, while one voted for a cut, suggesting the tide could soon begin to turn.
“Just yesterday we saw inflation drop to 3.4%, the lowest level seen since September 2021, but the journey to get there has not been plain sailing and there is still some way to go to reach the Bank’s 2% target. Wage growth continues to be a significant driver of inflation, particularly in the service sector, and though this is now slowing a little it will no doubt make this target harder to achieve. There are also signs that the UK has already pulled itself out of the recession it entered at the end of last year with a return to a modest level of growth. As such, the Bank has reiterated that it will maintain its data dependent resolve until it is satisfied that inflation has come down far enough and will not see a further spike.
“Nonetheless, yesterday’s figures will have given the Bank of England some confidence that inflation is finally coming to heel, and with the 12% cut to the energy price cap due to kick in in April it will face increasing pressure to finally begin making cuts. The Bank has a difficult balancing act ahead of it as though it will be reluctant to move too much too quickly, it also risks being overly constrictive if it holds rates at this level for too long, so we are likely to see the first cut being made sooner rather than later.”
Ed Monk, Associate Director at Fidelity International, said:
“The hawkish tone from the Bank of England in keeping rates on hold will disappoint households, investors, and the Government. All could do with some relief from higher borrowing costs, but the Bank’s words today indicate it may be some months before it agrees. Still only one rate-setter on the MPC was willing to vote for a cut now, although two others no longer want a rise.
“Choosing when to cut rates is like trying to catch a falling knife – moving either too early or too late is likely to be painful. We know structural effects are likely to bring the headline rate of inflation down to near target in the coming months. Against that backdrop rates at their current level will appear even more painful. Yet the Bank knows inflationary pressures remain strong, in wages and service sector prices in particular.
“Fidelity’s own analysis for the global economy suggests the chances of growth picking up are rising – although our base case is that a ‘soft-landing’ of below-trend growth remains the most likely. Should growth prove more resilient, however, expectations for rate cuts may change and markets will have to get used to rates remaining higher for longer.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said:
‘’The Bank of England is continuing to keep an iron grip on high interest rates, with the monetary policy committee not for turning, despite inflation dropping back more sharply than forecast.
“The majority vote to keep rates on hold has hardly come as a surprise given the MPC’s past reticence towards cutting interest rates. Yet again there was a lone voice on the committee calling for an immediate rate cut, with the vote 8-1 for rates to stay on hold.
“The Bank of England has adopted the same stance as the Fed yesterday and the ECB last week, indicating that inflation is following the right path, but it’s still wary about the potential for prices to bubble up again. Squashed demand in the economy is returning with the latest PMI snapshot for March indicates the UK economy has edged away from recession, with economic output forecast to grow by 0.25% in the first quarter of the year.
“The Purchasing Manager’s Index threw up a bit of a worry for policymakers given that its measure of selling prices rose to the highest level since last July, an indication of continued upwards pressure. Input costs are continuing to climb due to wage pressures and higher shipping fees, so companies are pushing up prices. So, it’s not surprising that caution remains the name of the game for the Bank.”
Laith Khalaf, head of investment analysis at AJ Bell, said:
“It seems pretty clear the Bank is deciding when, not if, it should cut interest rates. Latest forecasts from the OBR suggest that inflation will hit target in the next few months, and if it does, the central bank will come under tremendous pressure to reduce rates. Since the start of the year, financial conditions have actually tightened, as expectations for interest rate cuts have been pared back.
“The key two year interest rate swap which informs the pricing of fixed rate mortgages is up to 4.6% from 4.3% in January. But this highlights how much markets got ahead of the curve at the beginning of the year. If we look back to August 2023, the swap rate stood at 6%, so there has been a considerable easing of financial conditions as inflation has fallen away. In anticipating interest rate cuts, markets have already done some of the heavy lifting in providing relief to businesses and households.
“The residents of Downing Street will be hoping for rate cuts sooner rather than later. Whether lower mortgage rates will shift the electoral calculus is questionable, but they can’t hurt. Lower borrowing costs could also potentially open up some wiggle room in the public finances, so if the central bank surprises markets by cutting rates aggressively, the government might be tempted to hold another fiscal event ahead of the election to spend the extra pennies on more sweeteners.
“So far though, the Bank isn’t making especially dovish noises which would suggest it’s going to shock markets by loosening faster than expected. However, the two hawks who had been agitating for an interest rate hike have now re-joined the herd and are happy with keeping rates on hold.
“While inflation is looking much more benign, it remains high enough to require the governor of the Bank of England to pen a letter to the chancellor explaining why CPI is so far above target. The labour market still looks pretty tight, and wages are now seeing real growth, which will add to domestic inflationary concerns.
“The Bank won’t want to cut rates, only to have to hike them again. It will therefore want to have a high degree of certainty that it’s got inflation licked before taking action. For the time being that means a plateau in rates until some conclusive data shifts the arithmetic.”
Luke Bartholomew, senior economist, abrdn, said:
“No surprises in the Bank’s decision to keep rates on hold. But the composition of the vote on the Monetary Policy Committee is a bit surprising, with both policy makers who had previously voted for further rate increases voting today to keep policy on hold. This change in vote will fuel market speculation about the Bank pivoting towards rate cuts in the near future.
“Certainly, the recent progress on returning inflation to target is encouraging, with inflation likely to be below 2% by the middle of the year.
“But with wage growth still elevated and underlying inflation pressures likely to pull inflation higher again in the second half of the year, we think we are still a few months away from the first rate cut. However, once cuts start, ongoing economic weakness could see rates fall quite materially over the next few years.”
Rob Clarry, Investment Strategist at Evelyn Partners, said:
“As anticipated, the BoE held the base interest rate at 5.25%. But today’s change in votes signals that we are getting closer to interest rate cuts. Haskel and Mann, longstanding hawks, dropped their votes for higher rates, making this the first meeting since September 2021 with no votes for higher rates.
“Moreover, the softer than expected February inflation print should give the monetary policy committee (MPC) more confidence that inflation is on the right track. CPI rose by 3.4% in the 12 months to February 2024, down from 4.0% in January. The largest downward contributions to the CPI annual rate came from food, and restaurants and cafes, while the largest upward contributions came from housing and household services, and motor fuels. Although the services component of CPI remains elevated at 6.1% year-on-year, and the MPC will want to see more progress on this measure before they commit to a rate cutting cycle.
“On the growth side, the data is showing tentative signs that UK economic growth might be turning the corner. The UK composite PMI reading for March was 52.9, marking the third month in a row above 50 (50 signals expansion vs the previous month). This implies that the technical recession experienced in the second half of 2023 is now over.
“Today’s meeting doesn’t seem to have materially changed the calculus for money market traders, although the probability of a June rate cut has increased to 70% from 50% at the start of this week. The market took the decision and communications as dovish, with sterling weaker against the US dollar and gilt yields falling across the curve.”
Jamie Niven, Senior Fund Manager at Candriam, said:
“After today’s release it is quite clear that the MPC are closer to cutting rates than the market appreciated, certainly a few days ago when the first cut wasn’t priced until August. The phraseology of Bailey’s statement alongside Haskel and Mann removing their vote for a hike is clearly dovish relative to expectations and while markets are now pricing June for a first cut, I wouldn’t exclude the possibility of it coming in May.
“Headline inflation should fall below the target (2%) in April and remain there quite possibly through to the beginning of Q4. That gives the committee ample room to start cutting from rather restrictive territory. We remain positive on UK duration, certainly on a relative basis versus other major developed markets.”
Robert Dishner, Senior Portfolio Manager, multi-sector fixed income at Neuberger Berman, said:
“The Bank of England has moved closer to cuts as it votes to maintain rates at current levels. The 8-1 vote also saw two previous voters for hikes (Catherine Mann and Jonathan Haskel) now voting to hold rates at the current levels. This is the first time since September 2021 that no member voted for a hike. The Bank did not change the language “monetary policy will need to remain restrictive for sufficiently long,” but we view the vote as a bigger signal towards cuts in the May or June meeting.
“Additionally, the Bank is marking to market the freeze in fuel duty as announced in the Spring Budget and 2Q24 CPI is projected to be marginally weaker than forecast back in February at slightly lower than 2%. It noted ‘some upside risks remained around both the wage and CPI inflation projections,’ but we think this seems strange in the context of lowering the 2Q24 inflation forecast.
“On net, it is a modestly dovish result which opens the doors to rate cuts.”
Janet Mui, head of market analysis at RBC Brewin Dolphin, said:
“The Monetary Policy Committee (MPC) voted 8-1 to keep the Bank rate on hold but the outcome of the meeting is more dovish than expected. Notably, the hawks have surrendered at this juncture when inflation is undershooting the BOE’s expectations and traveling toward 2%.
“Mann and Haskel dropped their hike votes, which is the first time we haven’t seen a vote for a rate hike at a BOE meeting since September 2021. The MPC has clearly shifted to a consensus of keeping rates on hold, with its tightening bias all but eliminated. The question now turns to when rates cuts will start.
“There is no clear evidence of a shift to an easing bias yet, though the BOE’s Chief Economist has floated the idea that restrictive monetary policy and cutting rates are not mutually exclusive. The growth outlook is a bit brighter as the BOE judges that the recession is already over, with little incremental inflation pressures as growth remains tepid.
“The markets cement their expectations for about three rate cuts this year, starting as soon as June. We believe rate cuts can happen in the second half of 2024 provided inflation is on the right track.”
Jonathan Sparks, Chief Investment Officer – UK and Channel Islands at HSBC Global Private Banking & Wealth, said:
“As widely anticipated by the markets, the Bank of England (BoE) remained on hold for the fifth meeting in a row. Inflation has come down sharply, however, it remains above the BoE’s 2 per cent target. We think the BoE will cut rates later and more gradually than market expectations. We don’t see the first UK rate cut until August, with subsequent easing taking the bank rate to 3.75 per cent by end-2025. With MPC members now broadly on the same page, the path for monetary policy outlook is becoming less uncertain. Whether the first cut is in June or August, the important point is that rates are likely to move lower from here at a steady pace.
“The markets have reacted to the more hawkish committee members, Haskel and Mann, of the committee no longer calling for a hike, leading to some support for gilts and GBP weakness.
“Putting aside the tax advantages, we are bullish on gilts and don’t mind taking duration. In this cycle, investors haven’t held back from pricing interest rate cuts, which means that those nearer-term gains coming down the pipeline from lower rates are already baked into the yields. But look past the next couple of years, and investors seem too bullish on rates to us. This points to an opportunity to add to duration in gilts. GBP continues to be vulnerable owing to fluctuations in the UK’s balance of payments, with the reliance on less sticky investment flows that can blow hot or cold. Also, GBP looks strong based on a real exchange rate basis. Despite the economic improvements, the UK is still in the shadow of the US, which is more supportive of the USD. Hence, we expect it to continue to slide towards USD1.20 by 2024-end.
“UK equities are fairly valued and are currently at attractive levels, particularly those with a domestic focus. Although the UK is exiting recession, its momentum is unlikely to pick up much as consumers still feel squeezed.”
James Lynch, fixed income investment manager at Aegon Asset Management, said:
‘The Bank of England today kept interest rates on hold at 5.25% as expected and they now remain at the same level since August 2023.
‘The BoE is transparent in its monetary policy committee voting pattern, with the nine members of the MPC having their votes published after every meeting. In a surprise move, two members (Haskel & Mann) who previously voted for hikes moved to unchanged with one dissenter (Dhingra) who voted for a cut. So an 8-1 vote split.
‘This, in our view, increases the chances that the majority of the committee will vote for a cut in interest rates at the next meeting on the 9th May. The reasons for cutting rates are becoming clearer as we get more incoming data.
‘Inflation will fall below target by May, the economy is sluggish at best and the labour market while still tight is starting to loosen.’
Peter Goves, Head of Developed Market Debt Sovereign Research at MFS Investment Management said:
The MPC voted to hold the Bank Rate at 5.25% at its March meeting in line with the market’s expectation. This is the fifth consecutive pause and is based largely on the idea that “key indicators of inflation persistence remain elevated”. However, a dovish element to this meeting was the dropping by Haskel and Mann to vote for a hike. With Dhingra still voting for a 25bp, the vote split was therefore 8-1. Overall, the MPC remains evidence driven and although there is progress to getting inflation back to target sustainably, the MPC doesn’t yet appear to have the confidence to embrace cuts immediately. The minutes indicate that a sharp move to neutral is unlikely near term even with cuts.
“The BoE rates are at terminal and are restrictive. As detailed, “the restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labour market”. The market view is still supportive for duration.”
