Bank of England Rates Decision: What to Expect on May 9

We
may
not
get
definitive
answers
to
all
of
these
questions
but
falling
inflation
and
weak
economic
growth
lay
a
path
for
the
Bank
to
start
preparing
to
cut
interest
rates
from
5.25%,
where
they’ve
been
since
August
2023.
This
hike
was
the
14th
consecutive
increase
and
took
rates
to
a
15-year
high.
In
March,
eight
members
of
the
MPC
voted
for
no
change,
and
one
for
a
cut.
Will
more
policymakers
back
the
case
for
monetary
easing?

Is
the
Bank
of
England
Waiting
for
the
Fed?

Because
the
Bank’s
most
recent

monetary
policy
meeting
was
as
long
ago
as
March
21,
a
lot
has
happened
since.
There
is
a
sense
that
the
UK
now
has
to
get
up
to
speed
with
the
changed
expectations
for
interest
rates,
which
can
be
summarised
as:
higher
for
longer.
Until
recently,
the
Federal
Reserve
was
expected
to
take
the
lead
and
start
cutting
interest
rates
this
spring,
with
other
central
banks
to
follow.
But
the
Fed
is
now
signalling
that
rate
cuts

are
not
on
the
horizon,
but
ruled
out
a
rate
hike
in
May
1^st’s
meeting.
The
European
Central
Bank
could
be
the
first
to
cut,
at
its
June
meeting,
as
inflation
continues
to
fall
in
the
eurozone.

While
the
Bank
of
England
is
not
co-ordinating
with
the
Fed
or
ECB,
it’s
mindful
of
global
trends
and
domestic
issues
too.
This
leaves
the
Bank’s
monetary
policy
committee
in
a
bind;
it
could
in
theory
act
before
the
Fed,
and
our
inflation
picture
is
better
than
in
the
US,
but
not
by
much.
We
have
some
of
the
“stickiness”
in
inflation
that
is
troubling
the
Fed
policymakers,
but
our
inflation
at
3.2%
is
below
that
of
the
US,
where
the
latest
CPI
reading
was
3.5%.
The
UK
economy
is
weaker
than
that
of
the
US
–

as
the
OECD
pointed
out
this
week
–
so
monetary
easing
could
be
less
problematic
and
could
help
stimulate
parts
of
the
economy
such
as
the
housing
market.
The
chart
below
shows
how
rapidly
inflation
has
fallen,
but
the
Bank
may
want
to
see
it
falling
further
before
acting.

When
Will
the
Bank
Start
Cutting
Interest
Rates?

The
Bank
of
England
is
expected
to
hold
rates
at
5.25%
at
May’s
meeting,
according
to
FactSet
consensus,
but
the
publication
of
the
monetary
policy
report
will
give
some
more
up-to-date
forecasts
on
the
UK
economy.
Most
importantly,
we
may
get
some
hints
about
the
Bank’s
possible
timescale
for
rate
cuts,
although
this
is
a
subject
that
is
usually
circumnavigated
carefully.
We’ll
also
get
some
indication
about
when
UK
inflation
is
expected
to
fall
back
to
the
2%
target
(it
may
even
fall
below
this
in
2024).
The
next
UK
inflation
data
is
released
on
May
22,
but
the
Bank’s
next
meeting
and
interest
rate
decision
is
not
until
June
20,
after
the
ECB
and
Federal
Reserve
have
announced
their
decisions.

When
the
Bank
will
cut
is
the
key
question,
but
it’s
one
that
UK
interest
rate
setters
are
in
no
hurry
to
answer.
Market
pricing
suggests
August,
and
the
OECD
report
predicts
the
third
quarter
as
the
most
likely
period
–
and
that
rates
will
be
3.75%
by
the
end
of
2025.
Remember
that
at
the
end
of
2023,

some
investment
banks
were
expecting
the
BoE
to
have
cut
by
February
and
March.
Ahead
of
the
meeting,
the
Bank’s
chief
economist
Huw
Pill
said
recently
that
rate
cuts
are
still
a
way
in
the
future.

In
March,
MPC
members
voted
8-1
to
hold
rates,
with
one
member
voting
for
a
cut.
The
composition
of
this
is
likely
to
change
in
May
–
could
we
see
any
lone
voices
arguing
for
a
rate

increase?

UK
Mortgage
Rates
Have
Gone
Up
Again

There
are
some
contrarian
voices
out
there
–
this
week
I
spoke
to
Ariel
Bezalel,
fixed
income
fund
manager
at
Jupiter
(he
manages

the
Silver-rated
Jupiter
Strategic
Bond
fund).
He
argues
that
the
Bank
could
start
cutting
rates
sooner
than
the
market
is
expecting,
which
means
UK
gilt
yields
are
attractive
at
current
levels.
UK
government
bond
yields
for
two
years
are
around
4.4%,
around
4.2%
for
the
five
year
and
4.30%
for
the
10
year
gilt,
although
this
maturity
is
trading
above
its
par
value.
(For
more
on
how
government
bonds
work,
my
recent
article
gives
an
overview.) 

What’s
significant
is
that
these
yields
have
started
to
go
up
again,
suggesting
that
bond
markets
are
pricing
in
a
“higher
for
longer”
narrative
for
the
UK
too.
This
will
be
unwelcome
news
for
homeowners
moving
off
cheaper
fixed-rate
products
this
year,
because
mortgage
lender
have
started
to
put
interest
rates

up
again.
Faster
rate
cuts
than
the
market
is
forecasting
could
see
these
gilt
yields
fall,
but
this
will
push
bond
prices
up.

In
terms
of
the
stock
market,
the
UK’s
FTSE
100
has
hit
a
record
high
recently,
so
a
rate
cut
could
improve
already
decent
sentiment.
UK
interest
rates
have
been
5.25%
since
August
2023,
so
any
sign
that
the
Bank
is
reversing
the
14
rate
cuts
since
2021
will
be
welcomed
by
businesses
and
consumers
keen
on
cheaper
borrowing
costs.

Of
course
a
lot
depends
on
the
currency
movements
because
many
UK
listed
stocks
report
in
dollars;
the
Fed’s
“no
cuts”
line
has
supported
the
dollar
this
year.
The
pound
has
weakened
against
the
dollar
in
2024
as
a
result
but

strengthened
against
the
euro,
because
the
eurozone
may
see
a
rate
cut
before
the
UK.
(Currencies
follow
rate
movements
closely.
Countries
such
as
the
US
with
higher
interest
rates
are
more
attractive
for
global
investors,
supporting
the
price
of
dollar-denominated
assets.)

How
Would
a
Future
Interest
Rate
Cut
Affect
Me? 

So
what
would
a
rate
cut
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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