Comment: Experts react to interest rate decision

UK interest rates on hold as BoE maintains ‘wait and see’ approach
 
As expected, the Bank of England (BoE) has again kept its base rate at 5.25% today, the fifth consecutive freeze at a 16-year high. Although inflation pressures now show clear signs of easing, the Bank is set to keep a tight grip a while longer as it gains more confidence that price rises above its 2% target are truly vanquished.
 
When will interest rates start to fall?
 
In the absence of inflationary curveballs, it’s a matter of when, not if, interest rates will be cut. Price pressures are showing clear signs of easing and will recede further still with household energy costs poised to fall by 12% as the Ofgem price cap is cut in April. A base rate of 5.25% would be at odds with price rises coming much closer to target as the year progresses.

At the same time, the BoE is cautious of declaring victory too early and letting inflation back out of the bag. The Bank is no doubt pleased with yesterday’s drop in CPI inflation to 3.4%, but services inflation, indicative of domestic inflationary pressures, is still running too high at 6.1%. It is likely to want to squeeze this out of the system before risking a rate cut.

Escalating wages and a general tightness in the labour market continue to exert upward pressure on services inflation. With tentative positive signs coming from the economy and consumer confidence reaching a two-year high, the Bank will be wary of inflationary embers being rekindled, especially with a rise to the minimum wage coming in April alongside a further cut to National Insurance that stands to add to household spending power.

Overall, it seems likely the balance of MPC members will lean towards keeping rates where they are for a couple more months as they await concrete evidence that wage growth and services inflation are falling back, which will more conclusively signal that price rises can sustainably return to target. However, that does come with the risk of curtailing the economy’s tentative progress out of a shallow recession, as well as maintaining the pressure on households with significant borrowings.
 
What does it mean for household finances?
 
The impact of higher interest rates will continue to bite for the next 12 to 18 months, even if mortgage resets won’t be as painful as they could have been six months ago. Lower new rates since the start of the year have provided some relief, and with the bond market far less volatile there is at least some greater certainty for households juggling cost of living pressures with mortgage debt. Yet there are no indications of a return of ultra-low-interest rates that prevailed for much of the previous decade. Cuts to rates will be modest compared to the steep rise since early 2022.

For savers, there remains the prospect of a period of inflation-beating returns from cash as price rises continue to recede and interest rates remain elevated to ensure they do. However, it’s a case of making hay while the sun shines. The best deals for fixed term cash rates are now behind us as the market looks ahead to a decline in BoE rates over the course of 2024. Cash can therefore be expected to lose its gloss versus assets such as bonds and shares as the year progresses.
 
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Any predictions that yesterday’s inflation announcement would precipitate a drop in the base rate were optimistic – the Bank of England has not bowed to pressure to cut rates in recent months, and it is likely to still be wary of a potential uptick in inflation thanks to tax cuts and minimum wage rising in the coming months.

“Interest rates will come down soon enough, with most experts anticipating a cut in June, or at the latest August. But this won’t mean blue skies all around. While higher interest rates remain a major issue for debtors and mortgage holders, the cost of living is still untenable for many households thanks to slowing wage growth and prices – especially for food – still rising.

“Now is not the time to reduce the base rate; the risk that inflation will rise again is still too great. For those in a position to do so, now is an opportune moment for consumers to take advantage of the available savings opportunities, as we should expect rates to fall as we move closer to the Bank’s eventual decision to cut the base rate.”

Paresh Raja, CEO of Market Financial Solutions, said: “Yesterday’s inflation data didn’t fall enough to move the needle for the Bank of England, but the property market is already benefitting from the stability that a static base rate provides. Mortgage rates have fallen, buyer demand has risen, and we’ve seen a return to growth where house prices are concerned, all contributing to a solid start to the year for the property market.

“Clearly, buyers are adapting to the higher rate environment, and lenders are being bolder in the rates and products they are offering. This is important – even when the Bank does cut the base rate, we have to be realistic in accepting that rates will not come down as quickly as they went up, so the market has to adjust to a different interest rate environment.

“The early signs are that this is happening, and while inflationary pressures and election uncertainty remain as bumps in the road ahead, there is undoubtedly far greater confidence and optimism permeating through the property market.”
 
Lily Megson, Policy Director at My Pension Expert, said: “Yet another hold in the base rate may feel bittersweet for Britons. On the one hand, remaining quite so high is symptomatic of the plague that rampant inflation has inflicted upon people’s finances. On the other, with rates likely to have reached their peak ahead of a steady decline in coming months, savvy savers might take their last chance to capitalise by investing in fixed-term products like annuities or bonds.”
 
“However, it’s important that consumers don’t make any rash decisions. This rollercoaster of ups and downs tells us one thing: the current financial landscape is nothing short of nightmarish to navigate. It’s important Britons weigh up their options and their individual circumstances when selecting products that can pave the way for a brighter financial future – which ultimately means the government taking action in ensuring access to better financial education, independent financial advice and guidance for all.”

Bank of England dodges the spotlight but turns more dovish

Ben Laidler, analyst at investment platform eToro, said: “The steady-as-it-goes Bank of England decision, keeping interest rates at 5.25%, feels underwhelming in an historic week for global central banks, but we saw a dovish shift that will lift investor spirits that a rate cut may come before the August consensus that lags the world.

“It’s been a memorable week for central banks and interest rates with the Bank of Japan hiking for the first time in 17 years, the Swiss National Bank becoming the first major bank to cut this cycle, and the US Federal Reserve forecasting three cuts this year.

“The Bank of England monetary policy committee is becoming more dovish, with two members removing their calls for rate hikes and all now looking for unchanged or lower interest rates. This will have been encouraged by recent better-than-expected headline inflation readings, even as underlying core price rises remain the highest among developed market peers.”

What to consider if you’re thinking about delaying buying 
 
It can be difficult to judge the perfect time to buy a property. Waiting for your dream home, external factors, or a change in circumstances are just some of the things that can impact whether you press ahead or put the brakes on.
 
Ben Thompson, Deputy CEO, Mortgage Advice Bureau, said: “Some prospective homeowners have had their plans thrown up into the air over the last 18 months. Higher interest rates, record levels of inflation, and a resultant cost-of-living crisis have all had a significant impact on people’s finances and ability to get a mortgage. This has been coupled with elements of fear and uncertainty for some buyers over how quickly things can change.

“Our research found two in three (65%) prospective buyers made changes to their homebuying plans, with 15% delaying plans altogether. Whilst it’s been an uncertain time, the mortgage market is seeing normality return, with a positive start to the year. Competitive rates are available on the market, and this means plans can get back on track.

“If you’ve delayed your homebuying plans, or are still waiting to see how the market pans out, now is the time for action. It can take some time to find the perfect property, so speak to an expert adviser who’ll be able to discuss your options and affordability, ensuring you’re mortgage ready for when the time is right.”
 
To help, Ben outlines a few of the things to consider when deciding whether to delay buying.
 
Avoid trying to time the market
 
Delaying buying in the hope that the prices will drop and mortgage rates will fall further could lead to you missing out on your perfect property. It’s near impossible to try and time the property market at the perfect sweet spot. Mortgage rates have fallen to a new normal, and while there might be some changes to the base rate later in the year, if the experience of the last few years is anything to go by, it’s hard to predict what will happen. If you’re in the position to buy a property you like, go for it.
 
You’re buying a home – not just an investment
 
Buying a home is a huge financial decision, perhaps the biggest one we’re likely to make in our lifetime. You must remember that you’re buying your home for yourself. It’s much more than an investment that will rise and fall in value.
 
Consider the cost of delaying
 
Waiting to buy a house in the belief that the housing market could be in a better place in future is a common concern for potential buyers. While it’s easy to consider the savings you might make by the market dropping slightly, many prospective buyers forget the cost of delaying. Rental payments are often forgotten, so if you’re considering delaying, weigh up the costs alongside the potential savings you could make. You’ll often be surprised!
 
Get mortgage ready
 
Money worries are one of the biggest causes of stress when buying a home, and any delays or hold-ups can mean extra costs. Be as prepared as you can by getting your mortgage in principle organised. This means you’ll know exactly how much your mortgage lender will loan to you, without needing a full credit check. Doing so offers you greater security and a clearer understanding of what you can afford, minimising the risk of your mortgage being rejected when you do come to buy. By speaking to a mortgage adviser, they’ll be able to discuss your options and affordability, helping you to get mortgage ready.
 
Make sure all your ducks are in a row
 
Even if you’ve decided to delay buying, it doesn’t mean you shouldn’t be ahead of the game. Get your ducks in a row to get mortgage ready now for when that perfect property comes along. Getting your credit score in the best shape, having a mortgage in principle, an understanding of any government or lender support packages available and affordability checks in place will ensure that everything is ready, so you can kickstart your homebuying journey when you want to.

 
Nikos Tzabouras, Senior Financial Editorial Writer at Tradu commented:

“The latest deceleration of inflation along with weak economic activity and yesterday’s dovish vote split make a summer cut possible, along with market pricing points to such an outcome. However, inflation is still far from target and policymakers may have more work to do before pulling the trigger.

“The Swiss National Bank already became the first major bank to cut rates today. Furthermore, the UK central bank is behind its US and EU peers in the fight against inflation and unlike them, it has not signalled lower rates yet. This makes it more likely to follow than to lead the path towards lower rates. However, the BoE is known for its poor communication skills and has surprised before.”