01 August 2024
If you are covering the Bank of England cutting interest rates to 5%, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“The Bank of England has finally spotted its opportunity to cut interest rates and has enacted its first reduction since the onset of the pandemic today. This will bring a huge collective sigh of relief to consumers and businesses up and down the country after interest rates reached the highest level in 16 years.
“With the market having been on the fence ahead of the announcement, with a 66% chance of a quarter-point cut, in the event the decision by the MPC was indeed a very close thing with a 5-4 majority decision. The Bank of England is making it clear to everyone this will not be a speedy journey on the way back down as it does not want to cut too quickly or by too much and risk a fresh inflationary spiral.
“In recent months inflation has eased its path from a headline rate of 4% at the start of the year down to 2% presently, although it is expected to rise back towards 3% as the year progresses and the benefit of lower energy costs compared to a year ago becomes much reduced. Core inflation, which strips out volatile energy and food price movements, has been more stubborn, remaining at 3.5% for the past two months. The partly reflects structural challenges in the UK labour market that will require a more complex government-led solution to address the significant extent of economically inactive people, who dwarf the unemployed by a ratio of six to one.
“Despite the headwinds that the UK economy has faced, there is an air of optimism that has for some months been desperately lacking, even if further cuts may not necessarily be as speedily forthcoming as some might like. Whilst the Treasury appears keen to ‘kitchen sink’ the UK finances ahead of a tax grab in the Autumn, the new Labour government is acutely aware that in order to remain in power they must not only address the legacy they have inherited but also deliver growth whilst acting with a sense of urgency in order for the electorate to not only feel better off by the next election cycle but also to avoid further gains for Reform. So far, this approach has been viewed reasonably positively by investors, who have first and foremost welcomed the stability a new government has offered, particularly in relation to Europe and the US where power struggles continue. However, the likely cuts to public services, paired with inevitably higher taxes by the Autumn, mean that as ever, the devil will be in the detail.”
