Bank of England Holds Rates Despite Hitting 2% Target

The
decision
means
the
Bank
of
England’s
so-called
“base
rate”
will
be
held
at
5.25%
–
for
the
seventh
consecutive
time.
A
cut
is
now
seen
as
most
likely
to
occur
in
August.

The
move
was
widely
expected
by
markets,
as
demonstrated
by
overnight
futures
trading.
Indeed,
the
market
response
was
muted.
Ahead
of
the
vote,
the
FTSE
100
was
up,
and
is
now
only
slightly
higher
than
at
opening
this
morning,
at
0.36%.

Why
Has
The
BoE
Held
Rates?

In
a
statement,
the
BoE
said
a
return
to
the
2%
target
had
not
been
enough
to
convince
the
MPC
to
vote
wholeheartedly
for
a
cut.

“For
some
members
within
this
group,
the
return
of
headline
inflation
to
2%,
while
welcome,
was
not
necessarily
indicative
of
the
required
sustained
return
to
target,”
it
said.

“Continued
high
levels
of,
and
upside
news
to,
services
inflation
supported
the
view
that
second-round
effects
would
maintain
persistent
upward
pressure
on
underlying
inflation.

“Wage
growth
had
continued
to
exceed
model-based
estimates.
Indicators
of
domestic
demand
were
stronger
than
had
been
expected,
and
the
risks
to
the
outlook
for
activity
were
skewed
to
the
upside.

“For
these
members,
more
evidence
of
diminishing
inflation
persistence
was
needed
before
reducing
the
degree
of
monetary
policy
restrictiveness.”

The
statement
will
indicate
to
investors
and
traders
that
the
BoE
is
approaching
a
rate
cut
very
cautiously
indeed,
and
that
it
could
be
some
time
before
rates
come
down.

This
is
something
of
a
departure
from
the
upbeat
picture
markets
had
expected
at
the
end
of
last
year,
when
it
was
thought
2024
would
be
punctuated
with
multiple
cuts
by
multiple
central
banks.
In
the
US,

some
expected
as
many
as
five
rate
cuts
in
2024.

How
Are
Fund
Managers
Reacting
to
the
Rate
Hold?

In
a
note,
Georgina
Hamilton,
fund
manager
of
the

Morningstar
4
Star
and
Gold-Rated
Polar
Capital
UK
Value
Opportunities
Fund,
says
the
BoE
is
now
clearly
pursuing
a
“no
surprises”
approach.

“Core
inflation
should
[now]
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,”
she
says.

“Today’s
move
certainly
signals
one
thing:
the
BoE
wants
no
surprises
when
it
actually
does
cut.
It
will
want
sterling
to
remain
calm
over
the
rate
cuts,
but
will
no
doubt
take
comfort
from
the
foreign
exchange
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%.”

How
Would
a
Future
Interest
Rate
Cut
Affect
Me? 

As
the
Bank
announces
another
rate
hold,
chatter
turns
to
when
the
cutting
cycle
might
begin.
But
what
would
that
mean
for
consumers,
and,
crucially,
those
with
savings
and
investments?

As
interest
rates
decrease,
cash
savings
rates
on
bank
accounts
and
ISAs
will
likely
decrease,
meaning
savers
may
start
getting
less
bang
for
their
buck
at
the
bank.

However,
lower
rates
will
also
make
consumer
debt
cheaper,
which
could
bring
relief
to
people
with
substantial
credit
card
debt –
and
mortgage
holders
with
variable-rate
products.
Those
who
have
remortgaged
into
fixed-rate
products
in
the
last
two
years
may
not
feel
this
until
they
remortgage
once
more.

What
Will
Equities
and
Bonds
do
if
Rates
Are
Cut?

Markets
tend
to
“price
in”
any
changes
very
quickly,
so
the
reaction
to
this
kind
of
news
will
be
swift.
Conventional
wisdom
suggests
rate
cuts
are
better
for
equities
than
bonds.
But
while
bonds
have
returned
to
favour
in
the
higher
interest
rate
era
because
of
their
tempting
yields,
rate
cuts
may
not
be
bad
for
them
either.

Falling
interest
rates
mean
lower
yields,
which
push
bond
prices
ever
higher
–
a
key
factor
in
total
returns.
And
lower
rates
make
existing
bonds,
and
particularly
those
already
issued
during
a
period
of
rate
hikes,
more
attractive
for
yield.

In
addition,
many
pension
funds,
for
whom
rising
bond
yields
have
caused
havoc,
could
also
stand
to
benefit
from
a
looser
monetary
approach.
This
may
well
benefit
the
government’s
attempts
to
reignite
the
UK’s
stagnant
economy
as
(in
theory)
it
encourages
institutional
investors
to
plough
money
into
promising
growth
businesses.

How
Will
The
Real
Economy
React?

Over
in
the
“real
economy”,
the
unwinding
of
monetary
policy
will
likely
also
benefit
shops
and
online
businesses
who
have
been
squeezed
by
the
twin
spectres
of
supply
chain
inflation
and
lower
consumer
confidence.
If
higher
interest
rates
have
the
power
to
curb
spending
in
the
UK
economy
and
cool
gross
domestic
product
growth,
lower
rates
will
in
theory
create
the
opposite
effect.

In
practice,
however,
there
is
a
lot
of
uncertainty.
While
lower
interest
rates
tend
to
stimulate
the
economy,
the
UK
is
still
expected
to
suffer
from
low
growth
in
the
coming
years
wherever
rates
end
up.
Either
way,
it
will
take
time
for
the
precise
effects
to
be
visible,
let
alone
quantifiable.

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