FOLLOWING this morning’s dire GDP data, financial experts have said a rate cut next week is “almost certain”, while some say the chances of a 0.5% “mega-cut” have also been boosted as the Bank of England seeks to ignite a flailing economy.
Meanwhile, mortgage brokers said that the rate war that has been building in recent weeks could now intensify, as lenders price in a more dovish Monetary Policy Committee in the months ahead.
Ahead of the curve
After the US Federal Reserve cut rates for the third time this year on Wednesday, some financial experts had already said a “mega-cut” of 0.5% was possible.
Samuel Mather-Holgate, Managing Director at Swindon-based Mather and Murray Financial, a wealth manager, said: “I believe markets are underestimating the possibility of a 0.5% mega-cut in the base rate, as the Bank of England, for once, seeks to get ahead of the curve.
“After Friday’s GDP data, the chances of a more serious cut have further improved, at least if inflation doesn’t deliver a curveball on Wednesday.”
In a research note, HSBC also said “the weak print adds to the case for a rate cut on Thursday” although it, too, noted that Threadneedle Street “will be more immediately interested in next week’s jobs and inflation data”.
“Growth, growth, growth”
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, agreed that a bigger “0.5% cut is not out of the question”, while criticising Labour for its management of the economy. But she said the government had given the Bank of England the cover it needs to cut.
She said: “If your political rhetoric is growth, growth, growth’ while you load more costs onto businesses and households, you should not be surprised when the data turns ugly. But then you do give the Bank of England the cover it needs to pivot.
“A 0.5% cut is not out of the question but the key point is that policy will now be set with an eye to warding off recession first and worrying about inflation second, because in this debt-laden environment they simply cannot afford the “collapse” part of a normal boom-bust cycle.”
Mike Staton, Director at Mansfield-based Staton Mortgages, also said the Bank of England now has no choice but to act, but he suspects a 0.25% cut is the best the economy will get.
He said: “A rate reduction is nailed on now as the Labour government has effectively handed the baton over to the Bank of England to single-handedly save the UK economy.
“However, Threadneedle Street will keep to its usual form and reduce the base rate by 0.25%. No doubt the Labour Party will take the plaudits for another base rate reduction as Rachel Reeves stated in her devastating Budget.”
Baked in
Jack Tutton, Director at Fareham-based SJ Mortgages, also believes a rate cut next week is now baked in: “There aren’t too many certainties in life but a cut to the base rate next week appears to be one.
“With the US cutting theirs along with our shrinking economy, the choice for the Bank of England isn’t whether to cut the base rate or not but how much to cut it by.”
Tutton added that the poor GDP data could also benefit borrowers: “It could really ignite the rate war that’s been slowly heating up over the past couple of weeks.”
Borrowers to benefit
That view was shared by Justin Moy, Managing Director at Chelmsford-based EHF Mortgages, who said: “The poor GDP figures can actually be a blessing for mortgage borrowers, as a slowing economy can equate to a lower base rate, in a bid to stimulate the market as a whole.
“This 0.1% contraction in the economy will set alarms off at the Bank of England, and those on the MPC who have been sitting on the fence will feel it’s time to pull the trigger before Christmas.”
Shaun Sturgess, Director at Swansea-based Sturgess Mortgage Solutions, said the ever-cautious Bank of England could once again miss a trick: “While today’s GDP data makes a rate cut almost certain, I suspect the Bank of England will once again play it safe with only a modest 0.25% reduction.
“The reality is the economy needs a more decisive move — a 0.5% cut would send a strong signal of intent to stimulate growth and ease pressure on households and businesses.
“However, the Bank has shown time and again that it’s overly cautious and reactive rather than proactive.”
But not everyone believes a rate cut is nailed on. Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said: “If inflation was under control then a rate cut would surely be nailed on.
“As it is, we may see a hold until the inflation picture becomes clearer. A combination of inflation and low growth isn’t good for anyone so if GDP is struggling, inflation needs to be tamed.”
