“BoE awaits confidence inflation is vanquished” – interest rates held at 5.25%

Summary

• The Bank of England holds interest rates at 5.25% for the fourth time in a row
• The Bank’s committee voted 6-3 in favour of holding the rate – two wanted an increase, one wanted a cut
• The current rate, which was set in August, is the highest for nearly 16 years – and is expected to fall later this year
• Interest rates are the Bank’s key tool for tackling inflation, which means the increase in the price of something over time
• Inflation in the UK peaked in October 2022 but fell last year and is now at 4%. The Bank’s target is 2% which it says it could hit “within a few months, before rising slightly again”

 
Here is some commentary from around financial services:
 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “The Bank of England (BoE) has kept its base rate at 5.25% today, the fourth consecutive freeze. Although inflation pressures show clear signs of easing, the Bank remains keen to keep a tight grip and leave rates in restrictive territory while it gains more confidence that price rises are thoroughly vanquished.

When will interest rates start to fall?

“Central banks on both sides of the Atlantic are slowly but surely stuffing the inflation genie back into the bottle. Following a period of restrictive interest rates to quell the flames of price rises, inflation is melting away and 2024 is the year of the ‘pivot’ when they can turn their attention to when to cut rather than worrying whether they might raise them further.

“This is easier said than done as monetary policy acts with an unpredictable lag, which presents a double-edged risk: Slash rates too soon and inflation might creep back; cut too late and there may be more economic damage than necessary. Like landing a plane the Bank will aspire to get the trajectory just right.

“From the economy there’s some landing lights shining clearly with some signals of weakness starting to flash. The UK teeters on the edge of recession and the heat is now coming out of wage rises. Inflation should recede further too, towards the 2% target over the course of the year, with lower household energy costs expected from falling gas prices across Europe.

“Yet inflation’s downward trajectory cannot be taken for granted. An escalation in the geopolitical tensions in the Middle East has the potential to throw a spanner in the works, and some big increases to the state pension and the national living wage in the spring stands to add to household spending power and overall demand. The BoE will also be mindful of a March budget just around the corner where the Chancellor could unveil some fiscal easing.

“Despite the recent good news on inflation, there is a risk most of the easy wins are behind us and the BoE will not wish to declare victory too soon. Instead, it will likely lean towards keeping rates in restrictive territory for the first half of this year as it awaits concrete evidence that wage growth and services inflation are falling back, which will more conclusively signal that price rises are set to return to target. This will likely arrive in the coming months, and then, perhaps starting in June, the Bank will start to tentatively reduce rates.

What does it mean for household finances?

“Fixed rate mortgages and loans are priced according to expectations of the direction of rates in the coming months. If markets begin to doubt the extent to which the BoE can cut rates there may be an increase in the cost of debt. It is already difficult for many people rolling off fixed deals secured at lower levels two or three years ago, and with the quite sharp move down in borrowing costs since last summer there may not be much further respite for the time being.

“For savers, the increase in interest rates has been a welcome tonic compared with the dismal returns of much of the past decade. Going forward there is now the enticing prospect of a period of inflation-beating returns from cash for the first time since 2008 as inflation continues to recede and interest rates remain elevated to ensure it does. However, the best deals for fixed term cash rates are now behind us as market looks ahead to a decline in BoE rates over the course of 2024. Cash can therefore be expected to lose its gloss versus assets such as bonds and shares as the year progresses.”
 
Mohsin Rashid, CEO of ZIPZERO, said: “While the Bank of England is not tightening the vice any further, the pressure on people’s finances remains painfully intense. For millions across Britain, holding the base rate at this level equates to crippling debt and mortgage repayments – sinkholes on their road to financial recovery.

“The cost-of-living crisis cut people deep, and these wounds are yet to heal. Now, with a government that refuses to provide meaningful long-term support for struggling households, the fact remains – consumers cannot wait for any lifelines to drag them to a better financial future.

“Savvy decision making is a must for those struggling with high interest rates, persistent inflation, or both. From analysing supermarket prices or adapting buying habits to shopping around for competitive deals and using cashback apps, creative thinking is key to weathering the storm.”
 
Lily Megson, Policy Director at My Pension Expert, said: “Maintaining base rates is not an unexpected decision – perhaps inevitable given the sticky inflation of previous months. However, it offers no clear answers for those who have felt trapped in financial limbo for the past year.

“It’s impossible to say exactly when the battle between inflation and interest rates will end. However, more can and should be done to ensure those who are still struggling to plan for the future have access to adequate support.

“It’s therefore vital that the government takes affirmative action to ensure all Britons are able to access guidance and independent financial advice. These tools will empower Britons to make informed decisions, navigate the changing economic climate, and achieve a brighter financial future.”
 
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “The question since late 2023 has not been if the base rate will fall, but when. Inflation has been brought under control, but not fully stamped out – the Bank of England is clearly not ready to loosen its high-interest-rate position just yet, but the expectation is that multiple cuts to the base rate will come between now and the end of the year.

“It’s important to remember that the interest rate remaining static does not mean savings products will do the same – fluctuating swap rates and the future actions of the ECB and the Fed will precipitate lower returns on Britons’ saving pots, which will leave savers assessing their options in the coming weeks.

“As seen with last month’s surprise increase, the fight to bring inflation back down is far from over, leaving UK households compelled to contend with the challenge of interest rates for a little while longer. But this latest base rate announcement comes days after many households received their first pay package with reduced NI contributions, meaning more money in the pocket and an incentive to take advantage of the inflation-beating saving opportunities on the market.”