The Bank of England has reduced interest rates by 0.25 per cent to 5 per cent, marking the first cut since it was lowered to 0.1 per cent in March 2020.
According to experts, future rate cuts are expected to be gradual due to stable growth and ongoing inflation. Meanwhile, mortgage holders will benefit from lower payments but savers may see reduced returns. Additionally, experts recommend investing in ISAs or pensions for better long-term gains.
Hymans Robertson head of capital markets Chris Arcari says: “With the Bank of England 0.25 per cent pa rate cut announced today, we think the key point is that the pace of rate cuts from here is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.
“While headline inflation has been at the BoE’s 2 per cent target in May and June, energy prices mean it is likely to rise in the second half of the year and is forecast to reach close to 3 per cent by the end of 2024. Furthermore, recent data on GDP growth, services inflation and wage growth have all exceeded the Bank of England’s forecasts recently, which, all else equal, weighs against the BoE cutting rates.
“Nonetheless, lowering rates need not mean adopting a stimulative stance – given falls in inflation, monetary policy has continued to tighten through 2024 via rising real rates, despite the last rate rise coming in August last year. Put another way, higher than expected, yet easing, underlying inflation pressures can be seen to be consistent with a gradual reduction in interest rates to slightly less restrictive levels over time.”
Standard Life managing director for retail direct Dean Butler says: “This is a big moment as the Bank of England changes course and cuts rates for the first time since March 2020. After holding the base interest rate steady for a year, today’s 0.25 per cent cut to 5 per cent marks a milestone as the UK emerges from a prolonged cost of living crisis. While much predicted, its significance shouldn’t be underplayed – mortgage holders, particularly those on a tracker rate or approaching the end of a fixed period, and people with unsecured loans like credit card debt will welcome the positive impact on their repayments. Savers are likely to be less pleased – while there are some cash savings deals still hovering around 5 per cent, these are likely to fall off as banks react to today’s news and price in potential further rate drops later this year.
“It’s worth anyone with savings having a real look around at the market now. Based on the current 2 per cent level of inflation, someone with £10,000 to save into cash who snapped up a 5 per cent deal could see their pot worth £10,588 in real terms after two years. Someone who waited until rates dropped further and secured a 3 per cent deal could end up with £10,189 in real terms after two years, £400 less.
“Any gains will still be relatively marginal. For those with a greater appetite for risk, investing into a product like a stocks and shares ISA offers a greater chance of substantial returns. If you’re able to take a longer-term view, saving into your pension is both incredibly tax efficient and has the potential to outpace inflation over a number of years due to the power of compound investment growth.”
LV= chief investment officer Adam Ruddle says: “We’re pleased to see the Bank of England cut interest rates to 5 per cent, in line with our predictions, as headline inflation has been at its target for two months in a row, so now feels like the right time to cut interest rate before the strain on the economy becomes more pronounced.
“This action suggests that the Bank believes inflation has been tamed and challenges to the UK’s economic health has risen in prominence. We believe this will be positive news for our members and customers too who have been facing continued higher living costs and this change will help to reduce their outgoings. We believe the headline inflation rate may rise over the coming months and the Bank will likely pause at the next meeting rather than begin a sequence of rate reductions.”
Fidelity International investment director Tom Stevenson says: “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 per cent reduction in interest rates to 5 per cent 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 per cent.
“The Bank’s commentary confirmed the challenge it has faced in deciding whether to cut rates. Although inflation has been at its 2 per cent target for two consecutive months, the Bank said it expects it to rise to 2.75 per cent 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 per cent and 5.5 per cent 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 per cent 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 per cent on the day. The pound briefly topped $1.30 a month ago. The yield on government bonds fell below 4 per cent, as investors anticipated further cuts in interest rates to come. The 10-year bond yields 3.95 per cent, down from the peak of 4.75 per cent last summer but still higher than the 3.43 per cent 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.”
Cardano senior multi-asset strategist Ross Barr says: “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 per cent 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 per cent-5.50 per cent. 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.”
