The Bank of England (BoE) has maintained interest rates at 5.25 per cent with 8 members voting to hold while one voted to cut rates by 0.25 per cent.
Some experts have highlighted caution due to high core inflation while others expect potential rate cuts later in the year amid below-target inflation and slowing economic growth.
Hymans Robertson head of capital markets Chris Arcari says: “As expected the Bank of England left rates unchanged at a 23-year-high of 5.25 per cent p.a. Headline CPI inflation has fallen sharply, to 3.4 per cent year-on-year, from its 11.1 per cent peak in October 2022. Indeed, it is expected to fall further and even dip below target in late spring and early summer, as the full impact of lower energy prices and lower food and goods price inflation is felt.
“However, there are reasons for the Bank of England to err on the side of caution with regards easing policy. Core inflation, which excludes volatile energy and food prices, is still more than double the bank’s target at 4.5 per cent year-on-year. And service-sector price and wage growth, both running at 6.1 per cent year-on-year, are two closely watched measures of genuine domestic price pressures. These data points more than justify the BoE’s current wait-and-see approach.
“Nonetheless, recent and forecast declines in inflation are likely to open the door to rate cuts this year. Even though the BoE stopped raising rates in August last year, monetary policy has continued to tighten, as real interest rates have risen as inflation has declined, and so a moderately restrictive monetary policy stance can be maintained, even as interest rates are lowered. Additionally, central banks do not target realised inflation, but where they think inflation will be over the forecast horizon, which may be a reason for a central bank reducing rates even if core or headline inflation is still above target.
“Given weak real GDP growth and declining inflation, we see scope for two to three 0.25 per cent p. rate cuts this year. However, we expect central banks, including the BoE, to err on the side of caution and look to slowly make rates less restrictive, rather than cutting rates to levels that would be considered stimulative. Given still strong underlying inflation pressures, we see the balance of risks pointing toward the central bank reducing rates less, rather than more, than the market expects.”
AJ Bell director of personal finance Laura Suter says: “Savers have also seen rates rise and then fall, but at least inflation has fallen too. It means that many cash savers are getting a real return on their cash for the first time in ages. Rates in certain areas have improved – particularly in the cash ISA market, as providers are vying for savers’ money in the last few weeks of the tax year. It means that if you’ve put off your cash ISA selection you could profit from that competition now by securing a higher rate. But act fast, because once the new tax year rolls around those rates are likely to drop.
“Even though we’ve had rising interest rates for a long time, many savers are still leaving their money in accounts offering little or no interest. If you haven’t checked your rate or switched in the past year, then it’s highly likely you could get a better deal on your easy-access account. There will also be lots of people who locked in one-year accounts a year ago, when rates were high, and have now let them roll over into a standard savings account, often paying paltry interest. Moving your money is so quick and easy these days that shifting cash to a new account can be done on your commute or while you’re cooking dinner – just make sure you check the Ts and Cs so you’re not caught out later on.”
Aegon Asset Management fixed income investment manager James Lynch says: “The Bank of England today kept interest rates on hold at 5.25 per cent 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.”
