9 May 2024
If you are covering the news that the Bank of England has held interest rates at 5.25%, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“High interest rates are helping to bring down inflation, but more evidence is needed that this is a sustainable shift before rates can be cut. That is at least the message emanating from the Bank of England following its decision to keep interest rates at 5.25% for the sixth time this hiking cycle, but it may soon begin a process of gradual rate cuts. It has been a long and painful period for businesses and consumers, but it appears inflation is now close to being under control, and less likely to spike given energy prices are well off their highs and storage levels remain robust after a mild winter. Focus can thus turn to supporting economic growth at a time when the UK economy is struggling to escape the orbit of a growth rate that is effectively zero.
“While this feels significant, it is important not to get ahead of ourselves. Markets have been a little giddy in recent quarters about the prospect of interest rate cuts, but that has since faded. While markets have begun to price in rate cuts beginning by the end of the September meeting, the floodgates won’t simply just open. Central Banks have a tendency to be fairly conservative in the way they act and thus market expectations for just two rate cuts by year end look reasonable. As a result, any hope from the Government that these cuts will help sway the election may be misplaced as the impact will take a while to feed through properly.
“Furthermore, while the prospect of lower interest rates has so far done very little for consumers or businesses in 2024. Long term gilt yields, which form the basis of mortgage rates and long-term debt agreements, have risen around 60bps as markets have priced in higher for longer interest rates in the US, with markets sceptical that the Bank of England can diverge significantly from the script that the Federal Reserve are following without triggering a sharp drop in the value of sterling, and with it a further inflationary pulse. Slow and steady will be the order of the day when the time comes for the Bank of England to start cutting.”
