The Bank of England is poised to make a significant decision on Thursday, implementing its first interest rate cut since 2020. This move, if executed as expected by financial markets and economists, will come just hours after the US Federal Reserve hinted at a potential rate cut next month.
During its meeting on Wednesday evening, the Federal Reserve maintained its benchmark rate in the 5.25%-5.50% range. However, it downgraded its view on inflation to “somewhat elevated” and acknowledged “further progress” in the right direction. This aligns with market expectations for a rate cut at the next meeting on September 18th. Federal Reserve Chair Jay Powell stated that a rate cut is possible as long as data continues to move in a positive direction.
Meanwhile, major banks have already begun to cut rates ahead of the Bank of England’s announcement. According to a Reuters survey, a majority of economists predicted a rate cut from 5.25% to 5%. Market expectations reported by LSEG also show a 65% likelihood of a reduction.
However, some commentators caution that the lack of guidance from the Bank may mean a rate cut is not a sure thing. This could be attributed to the recent UK election and the Bank’s desire to maintain its independence. Nonetheless, a rate cut would be a welcome relief for borrowers, including mortgage holders, who have felt the impact of the Bank’s inflation-fighting measures since December 2021.
The UK was the first major economy to respond to the rise in inflation following the COVID pandemic. Inflation peaked after Russia’s invasion of Ukraine, which drove energy and commodity costs to unprecedented levels. This created a cost of living crisis that has continued to evolve. The Bank implemented 14 consecutive interest rate increases to control demand in the economy, but has held the rate steady since the last hike in August 2020. Despite this, certain aspects of inflation, such as for services, have remained high and the Bank has consistently warned about the pace of wage growth.
In addition to the interest rate decision, the Bank will also release its quarterly monetary policy report at midday on Thursday. This report will include the Bank staff’s latest projections on inflation, economic growth, and employment.
The Federal Reserve’s announcement and accompanying statement had little initial impact on financial markets, as the core message was largely expected. However, US stocks eventually gained momentum, with the tech-focused Nasdaq rising by 3% and the broader S&P 500 by almost 2%. The dollar also saw a slight decline, as lower interest rates typically weaken a domestic currency.
If the Bank of England does decide to cut rates, it is expected to do so with caution, as indicated by its nine-member rate-setting committee. This has prompted lenders to adjust their own rates in accordance with current speculation. Many borrowers are currently facing additional financial strain due to the Bank’s inflation measures. For example, mortgage holders have seen their monthly payments increase significantly when renewing their fixed-rate deals, while landlords have passed on their own borrowing costs to tenants, resulting in record-high rents.
Commenting on the potential outcome, Matt Smith, Rightmove’s mortgage expert, stated, “If the Bank Rate is cut, it will be really positive news and hopefully more will follow as the economy continues to stabilize.” He also added, “If it isn’t, people shouldn’t be too concerned – as it is highly likely it would follow in September, and I’d expect mortgage rates to hold steady and perhaps even trickle down a bit – albeit not quite as fast as if there is a cut.”
