Laura Suter, director of personal finance at AJ Bell, looks forward to this week’s interest rate decision from the Bank of England:
“Interest rates aren’t expected to go anywhere later this week, with the Bank broadly expected to hold rates at 5% after August’s cut. The Bank has been keen to reiterate that it will not move too swiftly to cut interest rates, meaning holding rates this month would stick to that playbook. Markets are pricing in a roughly two-thirds probability of rates remaining unchanged this month, leaving a chance of a cut to 4.75%. As always, these forecasts are based on market prices, which bounce around a bit and are vulnerable to fresh economic data shocks. With inflation data due this week, we can’t rule out an unexpected change to that impacting the Bank’s decision.
“After this week’s decision we then have two more decisions before the year is out, in November and December. The lack of a meeting in October means the Bank avoids the thorny issue of making a decision on interest rates immediately ahead of the Budget, and gives time to digest the government’s fiscal plans before making its next decision at the start of November.
“Regardless, interest rates are expected to end the year at 4.5% – signaling two successive cuts before Christmas. That would be the best present that wannabe homeowners could get, with a mortgage rates war already hotting up. More interest rate cuts could put fire-starters under the housing market once again, which has already seen activity pick up since last month’s cut. Equally, a hold to interest rates this month might mean that some buyers decide to delay their house buying journey until later this year, in anticipation of lower interest rates.
“But we all know not to rely on forward forecasts too much, as they can do a reverse turn very quickly. The data coming out of the UK is still patchy and all eyes will be on how the various members of the Monetary Policy Committee vote this week. Last time the cut to interest rates only just sneaked through, with five members voting for a cut and four voting to keep rates at 5.25%. It will be interesting to see how that split has changed, particularly as the MPC has a new member this month.
“Also of particular interest this month will be the Bank’s update on how it will unwind its Quantitative Easing program. This will have an impact on the profile of government debt over the coming years, because as the Bank of England sells bonds back to the market, it incurs losses on those sales. Losses that the Treasury needs to shoulder.
“If the Bank chooses to accelerate its bond sales, that brings forward those losses, thereby putting more pressure on the public finances in the short term and making it more difficult for the chancellor to balance the books. With Labour’s first Budget looming large at the end of next month, that would presumably be an unpopular decision at Number 11. The alternative is cutting back on bond sales, which will push more of those losses into the long grass, giving the chancellor more fiscal room to manoeuvre, for the time being at least.
“Regardless of the decision taken by the Bank, it’s possible in the forthcoming Budget the chancellor may seek to redefine the debt target to exclude losses from the Bank of England, which would serve to free up some much-needed money that could avoid drastic cuts to spending or tax hikes.”
