THE Bank of England (BoE) has held its base rate at 3.75% as expected with experts predicting “rate cuts are off the table until winter” and “anyone expecting a fast return to cheap money is living in the past”.
The Monetary Policy Committee (MPC) has voted 7 to 2 to hold the rate. The two voted in favour of a hike.
This comes as inflation remained at 2.8% in the year to May despite being expected to rise by at least 3%, the latest data showed yesterday.
And this morning, it was revealed that the unemployment rate in the UK was at 4.9% in the three months to April, down from 5% in the previous quarter.
Brokers and financial advisers have predicted that the BoE will remain defensive, with one saying “rate cuts are off the table until winter”.
But while base rate cuts may be off the table for now, Tracey Dixon, Owner at Cardiff-based Pure Mortgage and Protection, said she expects mortgage cuts will continue in the next few months.
She added: “The Bank of England may have pressed pause today, but the direction of travel still appears to be down. The decision to hold rates at 3.75% will not come as a surprise to most mortgage brokers. While many borrowers focus on the base rate, mortgage pricing is often influenced more by swap rates and lenders’ expectations of future movements.
“For homeowners coming to the end of a fixed rate, today’s announcement is unlikely to have an immediate impact on the deals available. However, it does provide some stability and may help support confidence that rates are continuing on a gradual downward path. I expect further cuts later this year, but the Bank is clearly taking a cautious approach as it balances inflation concerns with the need to support economic growth.”
I expect further cuts later this year
Lea Karasavvas, Managing Director at Potters Bar-based Prolific Mortgage Finance, said the BoE decision is “no doubt the right one”.
He added: “With inflation held at 2.8% yesterday and Trump signing the Iran peace deal on Wednesday, an unexpected turn of events just before the MPC meeting, placed a little more confidence in future rates. Swaps have steadily decreased over the last few days, and as a result, several lenders have already reduced margins and been more bullish with their rate cards this week, with several dropping and more drops planned.
“A hold on the base until the 60-day ceasefire agreement has successfully come to an end seemed the logical decision to see how the peace deal plays out. With the Strait of Hormuz pending reopening, this will start to soften oil prices and the damage on global economies will now start the repair process, boosted by a softening of interest rates.
“This decision was no doubt the right one, and one that hopefully will see out the 60-day ceasefire agreement before rates start their long journey back to pre-war levels.”
Richard Davidson, Mortgage Advisor at onlinemortgageadvisor.co.uk, said he expects mortgage rates to come down in the coming months.
He added: “I’m not surprised in the slightest. The last decision was an eight to one vote to hold, so the Bank has been telling us for weeks that it’s in no rush, and when the world is this unpredictable the smartest thing it can do is stay boring rather than signal a direction it isn’t sure of.
“My view is that rates will keep edging down gradually over the coming months, but nothing is guaranteed while the situation between Iran and the US is changing by the hour. Whatever happens out there feeds straight into energy prices and inflation, and one way or another it ends up landing in British wallets and on people’s mortgage statements.”
It signals deep institutional anxiety
Darryl Dhoffer, Founder at Bedford-based The Mortgage Geezer, said he doesn’t expect the BoE to reduce its base rate until the winter.
He added: “The Bank of England’s decision to hold the base rate at 3.75% is no surprise, but it signals deep institutional anxiety. While recent CPI data dipped to 2.8%, the MPC is frozen by the fear of a second-half inflation rebound fuelled by Middle East energy shocks.
“Some may call this overly cautious, arguing that a punitive 3.75% unnecessarily chokes growth when domestic services inflation has cooled to 3.2%. However, with a hawkish minority previously pushing for 4%, keeping rates steady is a calculated compromise. Expect the Bank to maintain this defensive hold through summer, keeping rate cuts off the table until winter.”
Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said no one should expect the base rate to be cut any time soon.
She added: “I am not surprised the Bank of England held rates at 3.75%. This always looked like the safest political and economic decision, but safest does not always mean strongest. The Bank is caught between two ugly choices. Raise rates and it risks squeezing households, businesses and the housing market even harder.
“Cut too early and it risks looking unserious on inflation. So it has done what central banks often do when the picture is messy: sit still and call it caution. My concern is that the Bank is becoming too afraid of the consequences of tightening again, especially with Westminster pressure and cost-of-living politics in the background.
“Inflation is lower, yes, but wage growth, services inflation and geopolitical risk still matter. My prediction is that rates stay on hold for the next few months unless inflation clearly breaks lower. Cuts are possible later, but anyone expecting a fast return to cheap money is living in the past.”
All roads lead to inflation, whichever path we take
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said the BoE had no choice but to hold.
She added: “A hold was the only card the Bank could play without showing its hand. The truth is the Bank is boxed in. It cannot raise rates by much, because the cost of servicing the nation’s debt makes that too painful to contemplate. And it cannot cut while an energy shock is threatening to push inflation back up.
“So it sits still and hopes nobody asks too many questions. Is it too cautious? That is the wrong way to look at it. This is not caution, it is a lack of room to move. The question assumes the Bank has good options. It does not. Raise rates and you strain a debt laden system.
“Hold them and the Pound keeps losing purchasing power as energy and import costs climb. Either way the saver pays. All roads lead to inflation, whichever path we take. Central banks will lean towards leaving rates where they are for as long as they can, because the alternative is worse.”
Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said the BoE is in a holding pattern to wait and see what happens in the global economy.
He added: “Holding was the only sensible choice today. The key event to watch will be the Middle East. If we start to see some stability and a normalisation of the oil price then it could increase the chance of an interest rate cut in the future. Until then a wait and see approach is the right course of action.”
I would treat the next few months cautiously
Adam Stiles, Managing Director at London-based Helix Financial Partners, said the decision should mean more stability.
He added: “With good news coming out of the Middle East, the Old Lady of Threadneedle is not being pulled in one particular direction, so a hold decision makes both sense and was expected. The knock-on effect we hope is more stability in the swap markets, which determine fixed rates, and in turn some further rate decreases from lenders.”
Antonia Medlicott, Founder & MD at London-based Investing Insiders, said she does not expect any base rate reductions or rises over the next few months.
She added: “The Bank of England holding the base rate doesn’t come as a surprise, as tensions from the US-Iran conflict have caused rate setters to take extreme caution and sit on the fence when it comes to decisions, clearly showing they are worried about the potential outcome of increasing the base rate.
“The major question for savers and borrowers is whether this is the last hold or the first in a sequence. After an initial deal was signed to end the war, this should signal that oil costs should decrease, but we know all too well that this isn’t guaranteed. I would treat the next few months cautiously, as we are still walking on eggshells; one wrong move and costs will spiral out of control, and the policymakers will be forced to reflect this in a rate increase.
“Inflation will almost certainly rise once the new energy price cap deal is reflected in those figures, taking it further away from the 2% target, which will cause further debate about whether we can hold the rate over the coming months.”
Holding was the only sensible choice today
Prem Raja, Head of Trading Floor at Currencies 4 You, said the Pound could benefit from a base rate hike in the near future.
He added: “The Bank of England has kept rates on hold, in line with expectations. With the recent positive flurry of data, including inflation and unemployment, it seems the BoE are in no rush to make any changes in monetary policy, which is positive for the UK economy.
“Currently it looks less likely that we see a rate hike anytime soon, but it is still a possibility, which could benefit Sterling exchange rates but potentially have a negative impact on the UK economy and the UK property market.”
Photo by Clay Banks on Unsplash.
