Bank Of England Follows US Fed With 5.25% Rate Hold – Forbes Advisor UK
21 March: Rate-Setters Want More Evidence Inflation Is Beaten
The Bank of England has kept the Bank Rate at 5.25%, leaving UK borrowing costs unchanged for the fifth consecutive time since August last year, writes Andrew Michael.
Its Monetary Policy Committee voted by eight votes to one to hold the Bank Rate at its 16-year high, with the one dissenting voice, Swati Dhingra, favouring a rate reduction of a quarter of a percentage point to 5%.
Today’s announcement echoes last night’s decision by the Federal Reserve, the US central bank, which also chose to maintain interest rates at their existing level (see story below).
Along with other central banks, the Bank of England is required to maintain inflation at 2% over the medium to long-term.
In a bid to head off soaring inflation levels that beset the UK economy through 2022 and much of last year, the Bank raised borrowing costs 14 times in a row between December 2021 and August last year, in the most aggressive round of monetary policy tightening since the 1980s.
Despite yesterday’s official figures which recorded a sharp fall in annual inflation to 3.4% in February, from 4% a month earlier, the Bank has continued to tread a cautious path in terms of its monetary policy decisions.
Explaining today’s decision, the Bank said: “Headline consumer price index inflation has continued to fall back relatively sharply in part owing to base effects and external effects from energy and goods prices.
“The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Nonetheless, key indicators of inflation persistence remain elevated.
“Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit.”
The Bank’s announcement means that millions of borrowers on variable rate and tracker mortgages and loans should not experience any direct impact on their repayments. Lenders, however, are at liberty to alter variable rate products should they choose to do so.
New borrowers and customers approaching the end of fixed deals and who need to re-mortgage this year, around one million account holders in total, will be watching closely to see how lenders react to today’s announcement.
In recent days, high street names have adopted different attitudes to pricing their home loan products confirming the importance for customers to shop around when looking for new deals.
For example, earlier this week NatWest chose to reduce selected five year fixed-rate mortgages, while TSB announced an increase to a number of fixed-rate loans.
The latest dip in the inflation figure means that today’s Bank Rate announcement allows savers to receive a ‘real’ return on cash held in bank and building society accounts, provided they seek out the best deals.
A real return is obtained when the interest being paid out from a savings account or bond is greater than the prevailing inflation figure.
According to Moneyfacts Compare, 80% of the UK’s savings accounts pay interest at above-inflation rates.
The MPC’s next rate-setting decision takes place on 9 May 2024.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Yesterday, we saw inflation drop to 3.4%, the lowest level seen since September 2021, but the journey to get there has not been plain sailing and there is still some way to go to reach the Bank’s 2% target.
“Wage growth continues to be a significant driver of inflation, particularly in the service sector, and though this is now slowing a little it will no doubt make this target harder to achieve. As such, the Bank has reiterated that it will maintain its data dependent resolve until it is satisfied that inflation has come down far enough and will not see a further spike.”
Nicholas Hyett, investment manager at Wealth Club, said: “The market was already anticipating that rate cuts wouldn’t start until the second half of the year, and there’s little in these numbers to change that perception.
“So what will ultimately trigger a change of course? We suspect that central banks around the world are waiting on the US Federal Reserve to set the pace. Once the Fed starts to cut, currency movements will likely force others to follow suit. As in so many other areas of public life, where the US leads, the UK will follow.”
Shaun Port, managing director of savings at Chase UK, said: “The decision to hold interest rates is welcome news for savers hoping to make the most of inflation beating interest on savings accounts. However, it’s a good idea to shop around as we’re starting to see some cuts to the rates on offer in anticipation of future rate cuts by the Bank of England.”
20 March: Fed Holds Rates Ahead Of Bank Rate Announcement
UK annual inflation fell by more than expected to 3.4% in February this year, its lowest since autumn 2021 and down from the 4% where it had been stalled since last December, writes Andrew Michael.
The announcement will strengthen arguments for the Bank of England to start cutting interest rates, with it having made significant progress in bringing down what has been a sustained period of rising prices.
Today’s Consumer Prices Index, from the Office for National Statistics (ONS), shows that prices rose by 0.6% last month, compared with a rise of 1.1% in February 2023.
Core CPI, which omits volatile data covering energy, food, alcohol and tobacco, stood at 4.8% in the year to February this year, down from 5.1% a month earlier.
CPI including owner-occupier costs (CPIH) rose by 3.8% in the 12 months to February this year, compared with 4.2% in January. On a monthly basis, CPIH rose by 0.6% in February, compared with a rise of 1% for the same month last year.
The Federal Reserve has today held interest rates in a range between 5.25% and 5.5%, with the strength of the US economy reinforcing its desire to wait before implementing cuts, writes Andrew Michael.
Explaining its reasons, the Fed said: “Recent indicators suggest the economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
“In considering any adjustments to the target range… [we] will assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%.”
Earlier this month, official figures showed that annual headline US inflation had nudged up to 3.2% in the year to February 2024, from 3.1% a month earlier.
The ONS said the largest downward contributions to the monthly change in the annual CPI and CPIH rates came from food and restaurants and cafes. This was offset by rising prices for housing and household services and motor fuels.
Grant Fitzner, ONS chief economist, said: “Inflation eased in February to its lowest rate for nearly two and a half years. Food prices were the main driver of the fall, with prices almost unchanged this year compared to a large rise last year, while restaurant and café price rises also slowed.
“These falls were only partially offset by price rises at the pump and a further increase in rental costs.”
The Bank of England, which is mandated by the government to keep long-term UK inflation at 2%, has maintained interest rates at their 15-year high of 5.25% since August last year.
Tomorrow, the Bank’s Monetary Policy Committee makes its latest pronouncement on borrowing costs. The strong expectation is that the influential Bank Rate will remain unchanged for the eighth month in a row from its 16-year high of 5.25%.
But today’s news offers hope that the UK’s central bank could start to bring down interest rates in the summer.
Alice Haine, personal finance analyst at Bestinvest, said: “Naturally, most households would welcome an interest rate cut tomorrow, but the BoE is expected to keep interest rates at the current level for the fifth successive meeting following 14 consecutive increases between December 2021 and August 2023. With the first rate cut not expected until the summer, all eyes are pinned on what the central bank has to say to see if there are any hints of earlier action.”
Lindsay James, investment strategist at Quilter Investors: ““With signs that the UK has already returned to a modest level of growth despite interest rates remaining high, this inflation reading will give confidence to the Bank of England that inflation is now coming to heel.
“As it looks likely to fall further in coming months, with the 12% cut to the energy price cap kicking in from April, the Bank’s monetary policy committee will be under further pressure to consider rates cuts sooner rather than later.”
Tom Stevenson, investment director at Fidelity International, said: “Inflation is likely to continue dropping through the spring as cheaper gas and electricity from April drives household energy costs lower. The key unanswered question is whether, and by how much, price growth bounces back from target in the second half of the year.”
12 March: UK Updates To Follow Next Week
Today’s US inflation figures show prices rising by a headline rate of 3.2% in the year to February, a shade up from the 3.1% annual rise recorded in January, while month on month the increase was 0.4%, up from 0.3%.
The core annual rate, which excludes notoriously volatile food and energy prices, fell to 3.8% from 3.9%, with the core monthly rate unchanged at 0.4%.
Inflation figures in national economies are used by central banks such as the Federal Reserve (Fed) in the US and the Bank of England to determine interest rate policy.
The relatively modest uptick in the US headline rate is expected to deter the Fed from reducing rates before June at the earliest – they are currently in the range 5.25% to 5.5%. Previously, commentators had believed a cut this month might have been forthcoming (the Fed’s next announcement is due on Wednesday 20 March).
In the UK, the latest inflation rate announcement from the Office for National Statistics is also due on Wednesday next week, with the Bank of England’s latest decision on its Bank Rate due the following day.
UK inflation is currently 4% a year, with the Bank Rate of 5.25% unchanged since last August. There is little expectation of a Bank Rate cut this month, especially given today’s figures from the US.
That said, in his Budget speech last week, the Chancellor Jeremy Hunt said he expects UK inflation to fall to the Bank of England’s target of 2% “in the next few months”, which would suggest a subsequent reduction in the Bank rate at some point in the summer.
If mortgage lenders grow confident that the Bank Rate will be cut, we are likely to see reductions in the cost of borrowing for house-buyers, although there will also likely be cuts in the interest rates paid to savers.
14 February: Bank Will Seek Better News Before Acting
UK inflation was 4% in the year to January, unchanged on December 2023, writes Andrew Michael.
While this was lower than market expectations of an increase to 4.2%, it still reduces the likelihood of an interest rate cut by the Bank of England before the summer.
Today’s Consumer Prices Index (CPI) from the Office for National Statistics shows that prices fell by 0.6% in January itself, the same rate as January 2023.
Core CPI, which leaves out volatile data relating to energy, food, alcohol, and tobacco, rose by 5.1% in the year to January 2024, compared with a figure of 5.2% recorded a month earlier.
CPI including owner-occupiers’ costs (CPIH) rose by 4.2% in the 12 months to January 2024, the same rate as a month earlier. On a monthly basis, CPIH fell by 0.4% in January, the same rate as January last year.
The ONS said the largest contribution to the monthly change in both the CPI and CPIH rates came from housing and household services, mainly through higher gas and electricity charges (the energy price cap rose by 5% on 1 January). These were offset by falls in the cost of furniture and household goods, food, and non-alcoholic drinks.
Grant Fitzner, ONS chief economist, said: “Inflation was unchanged in January, reflecting counteracting effects within the basket of goods and services.
“The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May.
“Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years. All of these factors combined resulted in no change to the headline rate.”
The Bank of England, which is required by the government to maintain long-term UK inflation at 2%, has kept interest rates on hold at a 15-year high of 5.25% since August 2023.
Earlier this month, the Bank’s rate-setting Monetary Policy Committee maintained a cautious tone, saying it needs more evidence that inflationary pressures have eased before it will consider bringing down borrowing costs. The next Bank Rate announcement is on 21 March.
Neil Birrell, chief investment office at Premier Miton Investors, said: “Unlike the US [see story below], inflation in the UK has come in a little better than expected in January. This will be taken as good news by those looking for rate cuts sooner rather than later, as it supports the view that inflation is heading back towards target.
“However, the Bank of England is still unlikely to be driven into any decisions that will risk the journey back towards its target being jeopardised.”
Alice Haine, personal finance analyst at Bestinvest, said: “Many households will have started 2024 feeling financially squeezed with pandemic savings used up and significantly higher living costs compared to just a few years ago.
“Once again, the uncertain economic climate signals that spending should remain constrained and emergency funds kept topped-up to ensure households survive any further financial shocks.”
13 February: Modest Fall Dashes Hopes Of Spring Rate Cut
Headline US inflation dipped to 3.1% in the year to January 2024 – a smaller fall than forecast – reducing the chances of an early reduction in borrowing costs across the Atlantic, writes Andrew Michael.
The UK inflation figures for January will be published tomorrow (Wednesday). The figure for the year to December was 4%.
Today’s official figures from the US Bureau of Labor Statistics show that its Consumer Price Index (CPI) for All Urban Consumers measure rose by 0.3% in January itself, slightly more than the 0.2 percentage point increase recorded in December 2023.
Explaining the data, the Bureau said that shelter (rental) costs continued to rise in January, contributing more than two-thirds of the monthly all-items increase. Food prices also increased last month, although the overall effect of these two elements was offset by a fall in energy prices prompted by a decline in the cost of fuel in January.
According to the Bureau, core CPI, which omits volatile food and energy prices, rose by 0.4% in January, compared with a 0.3 percentage point increase a month earlier.
The Bureau added that, over the year to January this year, core CPI, which is regarded as a reliable pointer to longer-term inflation trends, rose by 3.9%, the same level as reported a month earlier. Market watchers had been expecting a core CPI figure of 3.8% and a headline CPI figure of 2.9%.
The US Federal Reserve, like its UK equivalent of the Bank of England, is required to keep inflation at 2% over the medium to long-term. Last month, it left borrowing costs unchanged at a 23-year high in a range between 5.25% and 5.5%.
Economists and investors are watching to see how soon the Fed, responsible for the borrowing costs of the world’s largest economy, will start to bring down interest rates.
Having quelled a sustained period of inflation with its aggressive stance on monetary policy for the past two years, the expectation was that interest rates could begin to move downwards this Spring, heralding a series of quarter-point percentage rate cuts during the remainder of 2024.
But with inflation still well above target, coupled with resilient economic data since the start of the year – in the US jobs market, for example – the counter argument has been that a premature easing of borrowing costs will only exacerbate the potential for renewed inflationary pressures further down the line.
The next Fed announcement is due on 20 March, with the next Bank of England rate call the following day.
Michele Morra, portfolio manager at Moneyfarm, said: “US CPI has come out much stronger than expected, in a material blow to investors anticipating a spring rate cut. The rise in the core CPI will be a headache for the Fed, particularly as the data showed a monthly rise of 0.4%, which amounts to the biggest rise since May 2023.
“We can expect the Fed to emphasise the need for prudence and data-dependent decision-making to determine the appropriate timing and magnitude of any future policy moves. This approach would reflect a balance between the need to address disinflationary pressures, while also ensuring that policy actions are well-calibrated to support the Fed’s dual mandate of maximum employment and stable prices.”
Neil Birrell, chief investment officer at Premier Miton Investors, said: “We are well beyond just looking at the actual rate of inflation and are now focusing on the level of disinflation across goods and services, but it looks like everything is running hotter than hoped for.
“The Fed will feel vindicated in the language it has been using around rates cuts, as there can be little doubt that they are being pushed further out. We are not at the stage of worrying about inflation reaccelerating, but we are not out of the woods yet either.”
1 February: Cuts Expected From Summer Onwards
The Bank of England has, as expected, held its Bank Rate at 5.25% for the fourth time in a row, leaving it unchanged since August last year, writes Andrew Michael.
The Bank’s Monetary Policy Committee voted by six votes to three to maintain the Bank Rate at a 16-year high. Of the three unsuccessful votes cast, two were in favour of hiking the Bank Rate to 5.5%, while one favoured reducing borrowing costs to 5%.
Today’s announcement aligns with recent decisions by other central banks such as the US Federal Reserve and the European Central Bank (see stories below).
The announcement means that millions of borrowers on variable rate and tracker mortgages and loans should see no direct impact on their repayments, although lenders are free to increase variable rates if they choose.
New borrowers and those coming to the end of fixed deals and needing to remortgage this year – over one million borrowers – will be watching closely to see how lenders react to today’s announcement.
Today’s news also means that savers are able to receive a ‘real’ return on cash held in bank and building society accounts, provided they track down the best deals. A real return is obtained when the interest being paid out from a savings account or bond is greater than the prevailing inflation figure, which at the moment is 4%.
The top-paying fixed interest bonds are paying over 5%, according to our savings partner Raisin, with…
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