The Bank of England has just cut base rates for the first time since March 2020, to 5%. Some have called the move “bold”, and in one respect it was.
Yesterday, the US Federal Reserve decided against cutting interest rates. So for once the MPC has stuck its neck out rather than slavishly following the Fed’s lead.
Yet it was a close run thing. Four members of the BoE’s nine-strong rate-setting monetary policy committee (MPC) voted to hold base rates at 5.25%, while five voted to cut them.
It clearly isn’t convinced that inflation is on the run, despite headline consumer price growth hitting the BoE’s 2% target in both May and June.
Core inflation remains high at 3.5% while services inflation was even higher at 5.7%.
Worse, the BoE reckons inflation will start climbing in the last few months of the year, to 2.75%, as last year’s sharp drop in energy prices falls out of the annual calculations.
Personally, I think the MPC has been too slow. It could have passed on yesterday’s cut way back in January, or even last December.
Former PM Rishi Sunak must be frustrated at its timing, less than a month after his general election day debacle. Although given the Tory wipeout, a fistful of rate cuts wouldn’t have made much difference.
Today’s cut will make a difference to homeowners, though.
It will knock £17 off the monthly repayment of the typical £125,000 home loan. That’s a saving of £204 a year. Handy to have, but hardly a game changer.
The estimated 700,000 borrowers on fixed rate deals that expire this year will take that, though. As will 1.2million on tracker and variable rates.
The cut may do little for buyers, though, as vendors take advantage by hiking asking prices.
It’s bad news for savers, who’ll now get less interest on their cash deposits. As ever, borrowers and savers should fight back by shopping around for better deals.
Lower borrowing costs should put a bit of money into people’s pockets giving the economy a lift. It’s small beer, though. And it may be the only serving we get this year.
Markets are pricing in just one more rate cut in 2024, most likely in November. If correct, base rates will end the year at 4.75%.
Given BoE caution, I think we’ll be lucky to get that. It could be a case of “one and done” for 2024.
We’re a long way from heady predictions of six base rate cuts made at the start of the year.
I think the MPC should move faster, and look to bring interest rates down to 4% by the spring. Now that would really boost sentiment and help get things moving.
It’s too cautious to do that though.
At least we’re not relying wholly on the BoE of England to save the economy. Unemployment is low, house prices are climbing, wages are beating inflation, and whatever your view of Labour, our political stability is suddenly the envy of the world.
Now let’s hope the BoE pushes the recovery along by making another “bold” move before the end of the year. Or ideally, two. Sadly, I don’t think it’s got the guts.
