6 February 2025
If you are covering the Bank of England’s decision to cut interest rates, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“In a sign that the UK economy is looking increasingly fragile, even as inflation remains at palatable levels, the Bank of England has responded by lowering interest rates to 4.5%. The BoE’s prediction that inflation peaks at 3.7% in Q3 this year is quite shocking given previous forecasts and certainly won’t be helped by the April hike in minimum wages or higher National Insurance contributions on employers. So much so the previously expected pickup in growth this year is quickly becoming wishful thinking, however this remains the Bank’s key focus. Hiring has remaining subdued, whilst data from the service economy has highlighted that the pace of job cuts has accelerated to its fastest in four years as wage growth continues to outpace inflation.
“With supply chains passing on employment cost increases to the end customer, this is likely to put upward pressure on inflation in the coming months but will also put profit margins under pressure as consumers are likely to resist paying more.
“Whilst the economic picture has undeniably worsened in recent months, so too pockets of optimism remain. With wage growth so strong but sentiment weak, consumers have been rebuilding savings that will at some point be released into the economy, whilst the housing market continues to look resilient and further support will come from the two or three quarter point cuts to the base rate expected by the end of the year.
“The UK’s issue with productivity and growth will not be solved overnight, however, and as such the government must rely on the Bank of England to stimulate the economy. But, this all takes time to feed through and thus all adds up to the most likely outcome being yet more low, anaemic, growth rather than recession.
“For investors, this situation does present somewhat of a silver lining. With expectations already so low, UK equities, which have outshone the returns from the US year to date, continue to earn their place in portfolios.”
