'Rapid' interest rate cuts still in pipeline despite Bank of England holding fire

Policymakers on the central bank’s nine-strong monetary policy committee (MPC) opted to keep the base rate at its near 16-year high of 5.25 per cent, but said how long rates should remain on hold would be kept “under review”. Governor Andrew Bailey said there had been “good news” on inflation in recent months but that the committee needs to see more evidence that inflation will fall “all the way to the [bank’s] 2 per cent target, and stay there” before it can lower interest rates.

Mortgage holders and borrowers have been looking for a downward move on rates, perhaps as early as this spring, but recent inflation data has pointed to continued stickiness. According to the Bank of England, consumer price inflation is set to fall to an annual rate of 2 per cent between April and June this year, about 18 months earlier than previous forecasts. However, it will only stay at the target level temporarily before increasing during the second half of the year, and could rise to 2.8 per cent by the first three months of 2025.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said: “At the moment, all attention is on the mood music from the Bank of England rather than just the drum beat of the rate decision. There was a slight shift in sentiment around the table. Instead of three decision makers voting to increase rates yet again, two voted for a rate rise and one for a cut. Interest rate cuts are still in the pipeline this year, but it’s clear they’ll take a bit more time to flush out.”

Luke Bartholomew, senior economist at Scottish fund manager Abrdn, noted: “Clearly most of the MPC still think inflation risks are skewed to the upside and so want to push back against market speculation about an imminent rate cut. It seems like the re-indexation in many wages and prices this April will be a key waymark for interest rates. If this sees a re-acceleration in inflation pressure, then policy will need to be restrictive for longer.

“But if, as we expect, inflation falls sharply by the middle of the year, we think this will provide the all-clear for cuts to begin. And given the weak growth environment, when cuts do start, they’re likely to be quite rapid.”

Just over half of UK homeowners with a fixed-rate mortgage have had to reprice their mortgage deal since rates began rising at the end of 2021. This leaves about 2.3 million residential mortgage holders still set to see a jump in their repayments over 2024, with about 1.3 million facing an increase of more than £300 a month.

Kevin Brown, savings specialist at Scottish Friendly, added “Many investment market devotees believe a cut can’t be far off and that sentiment will be encouraging for mortgage holders. But for savers and retail investors it does start to beg the question, what is the best home for their money as we move deeper into 2024?”