The Bank of England raised the base rate by 0.25 per cent to 5.25 per cent today.
This represents the Bank’s 14th consecutive increase and takes base rate to 5.25 per cent, its highest in 15 years. The committee was split three ways on the vote, with 1-6-2 members voting for 0-25-50bps increases respectively.
Hymans Robertson head of capital markets Chris Arcari says: “With headline and core inflation running at 7.9 per cent and 6.9 per cent year-on-year, respectively, the Bank of England was fully expected to raise rates at today’s meeting. However, following June’s downside surprise in inflation figures– with both headline and core inflation falling more than expected – the Bank of England stepped back down to the more “usual” 0.25 per cent p.a. rate rise today, taking the base rate to 5.25 per cent p.a. Ahead of the announcement, markets were split between whether the BoE would raise rates 0.25 per cent p.a. or 0.5 per cent p.a.
“Given the more labour-intensive nature of the service sector, the BoE keeps a keen eye on UK CPI services inflation, which rose 7.2 per cent year-on-year in June. The BoE is concerned that strong service-sector price growth is being underpinned by strong nominal wage growth, which rose 7.3 per cent year-on-year in the 3 months to end May. Against this backdrop, the market is pricing in the BoE base rate will rise to around 6 per cent p.a. early next year.”
AJ Bell head of personal finance Laura Suter says: “It might feel like madness to call peak interest rates when the Bank of England has just raised rates for the 14th time, and the market is still pricing in another couple of hikes from the Bank this year. But for consumers this could be peak interest rates, as banks and building societies have started cutting both savings and mortgage rates.
“Slowing inflation means that interest rates aren’t expected to rise by as much as they previously were – a few months ago we were expecting rates to peak at 6.5 per cent but expectations now are 6 per cent or even 5.75 per cent. This has had the knock-on benefit that banks have reduced rates for mortgage customers. We’ve now seen a raft of big banks trim their rates – not sufficiently to make a dramatic difference to people’s monthly repayments, but homeowners will be breathing a sigh of relief that mortgage rates are headed in the right direction.
“Savers are the losers here, as it means an end to the successive savings rate hikes we’ve seen over the past 18 months. It means that anyone who has been playing the waiting game before locking into a fixed rate deal might be wise to move swiftly before rates drop further.
“The big caveat to this is that the next set of inflation data could throw us off course and into turmoil once again. If inflation falls by more than expected next month, that will mean markets likely re-price to expect Base Rate to peak at a lower point – perhaps even at 5.5 per cent. This would play into mortgage holders’ favour and mean lower mortgage rates. However, another surprisingly high inflation figure could mean that we once again go through the cycle of more calls for Bank of England rate hikes, peak rates hitting a higher level and mortgage and savings rates shooting up.”
Standard Life managing director for customer Dean Butler says: ‘It’s not a 0.5 per cent leap this time but the Bank’s 14th rate rise in a row will pile on the pain for the significant minority of retirees and those approaching retirement who still have a mortgage to pay off, particularly if they’re on a variable rate or hold one of the 2.4 million fixed deals set to end before the end of 2024.* Landlords might also pass costs on to renters, when permissible. The speed and severity of the changes have been good news for savers looking to keep up with high inflation, however many retirees or people approaching retirement fall on the flip side of rate rises and will now find themselves struggling and having to reassess their plans.
“Most estimates of the savings you need to live comfortably in retirement, including the Pensions and Lifetime Savings Association (PLSA’s) Retirement Living Standards, assume no housing costs – however, this is not the case for all. Analysis of government figures this week found 450,000 over 65s are still paying off their mortgages in retirement.** Levels of home ownership are falling*** and many people are also taking +30 year mortgages**** so more people will be approaching retirement with housing costs – in potentially a long-term higher interest environment.
“People who were planning to retire in the near future but still have mortgages or other debts face a tricky decision as the cost of borrowing continues to rise. The State Pension by itself isn’t enough for a comfortable retirement even without housing costs or other debts, and many don’t have enough saved in private pensions to bridge the gap. If you’re wondering what to do next it’s always worth taking advice if at all possible, speaking to your pension provider or your HR department at work, or using the Government’s free Pension Wise guidance service.”
Candriam senior fund manager Jamie Niven says: “The 25bps hike today was consensus with market and economist views prior to the meeting. Our takeaway is that the MPC favours a cautious approach to further hikes and gives the impression that the current restrictive rates are close to the peak it foresees. However, it would have been dangerous to communicate this alone given its potential impact on financial conditions, and it therefore prefers to imply higher rates for longer, as opposed to a higher terminal rate followed by cuts. It is our belief that the current restrictive levels will cause a larger growth impact, eventually resulting in lower policy rates than currently implied by market expectations.”
Evelyn Partners associate director of investment strategy at wealth manager David Goebel says: “Today’s decision by the MPC was always likely to be close, if markets are our guide. Prior to the meeting, Overnight Index Swap markets had priced around a 1/3 chance that the Bank would go further and increase by 50bps. In the end the MPC’s hawks, who would have preferred such a move, were outvoted by the majority, including governor Andrew Bailey.
“A key reason the Bank will have decided against the larger increase will have been June’s inflation numbers, which finally revealed a downside surprise in headline inflation and, perhaps more importantly, the core (excluding volatile food and energy) print.
“The core figure came in at 6.9 per cent, which will still high, was lower than July’s figure of 7.1 per cent. The expectation is for inflation to continue to fall as lower energy prices continue to feed through to the bottom lines of balance sheets, both for businesses and individuals. This was reflected in the MPC’s own inflation forecasts, which fell from 5.1 per cent to 4.9 per cent in the fourth quarter of this year, although this was allied with an increase in its inflation expectations over the medium term.
“The monetary policy report also included growth forecasts, which continued to make for pretty bleak reading, revealing a cut to forecasts to 0.5 per cent per year for 2023 and 2024. On the upside, the Bank agrees with the consensus of economists in no longer forecasting a recession in the UK, but it does highlight the risk of one in 2024 and early 2025.”
“Previous guidance in the minutes released today was maintained: “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,”.
“There was an Important addition about rates being “sufficiently restrictive for sufficiently long” for inflation to get back to the Bank’s 2 per cent target. That implies that interest rate cuts are perhaps further away than some had imagined.
“The Bank provided no clues to the market today on its plans for reducing the size of its balance sheet, saying it will lay out these plans at its next meeting in September.
“Reaction to today’s 25bps increase by markets was dovish, as expectations of where rates will peak moved slightly lower, from 5.85 per cent before the meeting to 5.75 per cent afterwards, at the end of this year or beginning of next. This will be welcomed by mortgage holders, in the hope that increasing rate expectations may have peaked, along with the cost of mortgage deals in the market.
“The yield on the 10 year government gilt remained broadly unchanged on the announcement and looks attractive in our view, at 4.4 per cent, as the Bank gets closer to the top.”
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