Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest interest rate decision from the Bank of England:
“It seems pretty clear the Bank is deciding when, not if, it should cut interest rates. Latest forecasts from the OBR suggest that inflation will hit target in the next few months, and if it does, the central bank will come under tremendous pressure to reduce rates. Since the start of the year, financial conditions have actually tightened, as expectations for interest rate cuts have been pared back. The key two year interest rate swap which informs the pricing of fixed rate mortgages is up to 4.6% from 4.3% in January. But this highlights how much markets got ahead of the curve at the beginning of the year. If we look back to August 2023, the swap rate stood at 6%, so there has been a considerable easing of financial conditions as inflation has fallen away. In anticipating interest rate cuts, markets have already done some of the heavy lifting in providing relief to businesses and households.
“The residents of Downing Street will be hoping for rate cuts sooner rather than later. Whether lower mortgage rates will shift the electoral calculus is questionable, but they can’t hurt. Lower borrowing costs could also potentially open up some wiggle room in the public finances, so if the central bank surprises markets by cutting rates aggressively, the government might be tempted to hold another fiscal event ahead of the election to spend the extra pennies on more sweeteners. So far though, the Bank isn’t making especially dovish noises which would suggest it’s going to shock markets by loosening faster than expected. However, the two hawks who had been agitating for an interest rate hike have now re-joined the herd and are happy with keeping rates on hold.
“While inflation is looking much more benign, it remains high enough to require the governor of the Bank of England to pen a letter to the chancellor explaining why CPI is so far above target. The labour market still looks pretty tight, and wages are now seeing real growth, which will add to domestic inflationary concerns. The Bank won’t want to cut rates, only to have to hike them again. It will therefore want to have a high degree of certainty that it’s got inflation licked before taking action. For the time being that means a plateau in rates until some conclusive data shifts the arithmetic.”
