The UK’s Bank of England today (6 February) cut base rate to 4.5% amid ongoing concerns about inflation.
In early reaction Neil Mehta, portfolio manager, RBC BlueBay Asset Management said: “A 0.25% cut was expected, but two MPC members preferring a 0.50% point reduction in the bank rate was a surprise and will drive near-term headlines and market prices.
“We understand the concerns around weakening demand, given the direction of data following last autumn’s budget, but the MPC has stated on countless occasions that it is committed to the 2% inflation target, reflecting the primacy of price stability in its actions. We are far from that yet with core inflation running above 3% and wages above 5%.
“Easing policy further risks increasing the probability of inflation persistence above 2%, with the BoE expecting headline inflation to rise to 3.7% this summer.
“Policymakers need to be aware that inflation shocks, whether energy related or perceived transitory, have a longer tail via wage/service inflation as workers and businesses are now more accustomed to passing on price increases and asking for wage rises.
“From an investor standpoint, the stagflationary thesis remains in the UK and the pound will likely bear some of that brunt. At the same time, easing policy with inflation expected to rise closer to 4% over the coming months won’t provide a sufficient anchor for long end Gilt yields to rally much.”
Laura Suter, director of personal finance at AJ Bell said: “Savers are in a better position now than last time interest rates were at 4.5%. Back in May 2023 the top easy-access current account was paying 3.7% but now savers can get 4.7% from an easy-access account with no withdrawal restrictions. They can get even more if they are willing to limit their withdrawals from the account each year.
“But average rates have fallen in the past year and lots of people will be earning piddly amounts on their savings. Even if you took action to switch accounts during the period of high savings rates, if it’s been more than a year since you moved accounts you might find the rate you’re getting has plummeted and you need to ditch and switch again.
“While interest rates on savings have been generally falling, the competitive period of tax-year-end has helped to prop rates up. What’s more, anyone looking down the barrel of paying tax on their savings will be pleased that there is more competition in the cash ISA market – with the highest easy-access rates actually being cash ISA accounts.
“We know that almost 2.1 million people are expected to pay tax on their savings this year, up from around 650,000 just three years ago. This tax-year-end is a good chance to assess whether you’re likely to get an unexpected tax bill and shovel some money into a cash ISA if so.”
She added: “Many homeowners will be baffled that despite multiple interest rate cuts, average mortgage rates are higher than they were a year ago. Even ahead of today’s base rate cut, which looked like a dead cert, mortgage rates headed in the opposite direction. Two-year fixed rates are now higher than they were in November last year and only a smidge lower than February last year** – despite two base rate cuts since then, while five-year rates are higher than two years ago.
“Homeowners have the turmoil in the bond markets to thank for their higher mortgage bills. While mortgage rates are linked to the base rate, they aren’t directly based on them. Instead they are reliant on swap rates, which track government bond yields – so bond market turmoil raises yields, increasing borrowing costs for banks and, in turn, mortgage rates.
“There is good news for anyone on a tracker or variable rate mortgage, who will see their monthly mortgage costs drop as a result of today’s cut. For someone with £125,000 of mortgage borrowing***, the 0.25 percentage point cut means an £18 a month saving on their bill, while for those with £400,000 of mortgage borrowing a 0.25 percentage point cut means a £58 monthly saving – or almost £700 a year.”
William Marsters, senior sales trader at Saxo in the UK said: “Risk of the UK’s stagnant growth and loosening labour market seems to have been front of mind for at least some of the BoE’s MPC after two members were in favour of a larger cut. This added a dovish spin to today’s meeting and has resulted in a weaker sterling. 10-year Gilt yields also dropped but have since bounced. The upward revision in inflation forecasts adds tension to further decisions as the central bank balances its mandate and the government struggles to achieve growth”
Nigel Green, CEO of deVere Group said: “This is a policy failure. The Bank of England has backed itself into a corner where it is too scared to cut rates aggressively due to lingering inflation, yet it also sees clear evidence that the economy is grinding to a halt. By trying to do both, it achieves neither—ensuring stagflation takes hold for a prolonged period.”
He said bank staff now expect the economy to expand by just 0.75% this year, down from a prior forecast of 1.5%, a brutal downgrade that underscores the damage being done. Meanwhile, the UK faces a £40bn tax squeeze, further choking consumer and business confidence.
Green continued: “This was the moment to act decisively, to drive growth and give businesses and households the breathing room they desperately need.
“Instead, the MPC has delivered a lukewarm response that could prolong economic pain. The UK is heading straight into stagflation, where growth stagnates but inflation remains stubbornly high.”
Jamie Niven, senior fixed income fund manager at Candriam said: “Today’s 25bps cut, although priced by the market beforehand, was not all in line with expectations as the split of the committee votes was certainly on the dovish side of the ledger. Most commentators assumed Catherine Mann, as recently the most hawkish member of the committee, would vote against the 25bps cut but remarkably she was one of two members who instead pushed for an even larger 50bps move.
“However, there is something for the hawks as well with the inflation forecast still above target in 2027. Compared to November MPC forecasts, near term growth was revised lower but inflation higher and indeed sustainably higher. This mixed picture is a slightly awkward place for the Bank to be in.
“Having been firm believers that the market was under-pricing the prospects for BoE cuts this year, we have now seen somewhat of a reassessment but still think the terminal rate pricing is likely too high. Further progress on inflation will be the key as to whether there is an acceleration in the quarterly cuts to support anaemic growth.”
