07 November 2024
If you are covering the news that the Bank of England has reduced interest rates by 0.25% to 4.75%, please find comments below from Lindsay James, investment strategist at Quilter Investors:
“The Bank of England’s decision to cut rates by 0.25% to 4.75% aligns with market expectations, which had priced in this move with a 95% probability. This decision comes as inflation has eased, with headline inflation dropping to 1.7% in September from 2.2% in August, and core inflation falling to 3.2% from 3.6%. Despite this benign inflationary backdrop, the UK economy has experienced weak growth over the summer, and pressures on employers have increased, even as unemployment remains low.
“Interestingly, long-term bond yields have risen recently, and the market has adjusted to price in fewer rate cuts despite the economic conditions. This shift is driven by concerns over the Labour government’s additional borrowing and changes to fiscal rules, which, although sensible, are challenging to implement amid current pressures on public finances. Additionally, rising bond yields in the US, fuelled by fears that inflation will remain above target while the economy stays strong, have influenced this trend. Donald Trump’s aggressive spending plans, projected by the Congressional Budget Office to increase US debt to GDP to 143% by 2034, have further compounded these concerns.
“The divergence between the Bank of England and the Federal Reserve poses challenges. If the Bank of England cuts rates more aggressively than the Fed, it could lead to a weaker pound, which would be inflationary by raising import costs for essential items like food and energy, potentially dampening consumer spending. However, it could also boost UK exports and attract increased US interest in UK mergers and acquisitions.
“With expectations for UK rate cuts now being scaled back, and rates not expected to fall below 4% in 2025, investors would be well advised to lock in borrowing rates where possible. The influence of US monetary policy remains significant, with interest rates likely to stay higher for longer.”
