The industry largely welcomed the decision by the Monetary Policy Committee at the Bank of England to hold interest rates at 3.75 per cent, though also warned of the possibility of a further rate hike by the end of the year.
The MPC voted 6–3 to keep rates unchanged. The three dissenters, Megan Greene, Catherine Mann and Huw Pill, wished to raise rates to 4 per cent.
This week, the Federal Reserve moved to increase interest rates in the US to 4 per cent, following a unanimous 12-0 vote. Last week, the European Central Bank increased deposit facility rates to 2.5 per cent.
Reacting to the BoE decision, Jonathan Ashworth, former HM Treasury economist and current chief economist at the Association of Chartered Certified Accountants, says: “While the Bank of England kept interest rates unchanged as expected at its meeting today, there is a growing risk of a rate hike before year end.
“A renewed rise in energy prices amid developments in the Middle East is increasing pressure on global central banks to tighten policy, with the US Federal Reserve hiking interest rates yesterday for the first time since July 2023.”
Inflation data from the Consumer Prices Index in the UK has shown a rise from 2.9 per cent in July to 3.1 per cent in August, broadly in line with market expectations. Using the CPI data, prices in the UK have risen by roughly 32 per cent since April 2020.
Emma Coleman, head of credit research at XPS Group, says: “Although pension schemes won’t be significantly impacted by today’s decision, they continue to pay close attention to how government bond yields change. This is especially relevant at longer maturities, given schemes use government bonds to hedge their long-dated liabilities.
“Recent weeks have seen a notable rise in government bond yields across the curve. In the UK, the move has been particularly pronounced at the long end of the gilt market, reflecting persistent inflation above the Bank of England’s 2 per cent target and ongoing fiscal concerns around high government borrowing and debt costs.”
Geopolitical events continue to push up prices around the world, including the war in Iran and the resultant impact on shipping traffic through the Strait of Hormuz.
David Rees, head of global economics at Schroders said: “The Bank was right to hold rates today. The markets may be building a case for an autumn hike, particularly if other central banks are tightening, but monetary policy should be guided by the fundamentals of the UK economy rather than global optics.
“Domestically generated inflation is contained, wage growth is decelerating and unemployment near 5 per cent points to meaningful slack in the labour market. This is not an economy crying out for higher rates.”
Rees also pointed out the significance of the Budget to be held in October, the first of Andy Burnham’s premiership, in deciding whether rate hikes will still occur later in the year.
Michael Browne, global investment strategist at the Franklin Templeton Institute, says: “The MPC has decided to leave rates unchanged, with the vote a repeat of the last meeting’s 6–3 split. It is clear that the MPC still sees enough slack in the economy to justify remaining on hold. Recent labour market data have remained soft, while private-sector wage growth continues to run below inflation.”
The next MPC meeting to decide interest rates will be held on 5 November.
Of the latest decision by the committee, Dominic Grinstead, CEO at MetLife UK, looked at the real estate perspective: “While the Bank Rate has been held today, swap rates – which influence the pricing of fixed-rate mortgages – remain elevated, putting continued pressure on mortgage costs.
“For those buying or coming to the end of a fixed-rate deal, a significant proportion of household income can be committed to keeping a roof over their heads, leaving little room for unexpected financial shocks.”
