Interest rates cut: Experts respond

• The Bank of England has cut interest rates from 5.25% to 5%, the first drop since the onset of the pandemic in March 2020

• The BoE’s rate setting committee voted by a majority of five to four to reduce the rate

 
Lily Megson, Policy Director at My Pension Expert said, “In a broader sense, today’s decision to cut interest rates after a year of holding them steady is a clear recognition of the improvements in our economy. Inflation has wreaked havoc on people’s finances and curbing it has been the top priority.

“However, while a welcome relief for borrowers, the road ahead remains tough for savers and those preparing for retirement. Crucially, prices are still high; the cost-of-living crisis isn’t over yet.

“As conditions start to stabilise, many will be eager to get their savings goals back on track. But it’s key not to make any hasty decisions. For instance, some might be tempted to quickly buy an annuity, as annuity rates may fall in response to the lower interest rates. However, such decisions should always be made with careful consideration.

“Creating economic stability is vital, but equally important is supporting individuals in their financial planning. Savers need to be informed and cautious – providing access to financial education and advice to respond to these changes effectively and secure their financial futures should be the top priority for the government.”
 
Indriatti van Hien, Fund Manager at Henderson Small Companies Investment Trust commented: “The Bank of England’s decision to cut rates by 25bps to 5% today is welcome news for the UK economy and stock market. Whilst nominal in absolute terms it is a meaningful milestone in the direction of travel for monetary policy should add to the already building momentum in UK business and consumer confidence.”
 
Paresh Raja, CEO of Market Financial Solutions, said: “The base rate has finally been cut, easing the barriers that have constrained the UK property market amid two years of high inflation and borrowing costs. I expect to see increased market activity in the coming weeks as a result.

“In recent months, we’ve seen a growing sense of optimism. With property prices and the volume of homes coming onto the market on the rise, today’s decision will likely encourage investors who have been holding back to re-engage. Despite the rate cut, however, borrowing costs remain extremely high, so flexibility for borrowers and brokers remains essential.

“Therefore, any potential rebound in the UK property market will hinge on the specialist lending sector. A recent survey shows that a substantial majority of bridging lenders expect loan volumes to rise over the next year. Given the uncertainty about future rate cuts, lenders should be offering a range of product options to accommodate brokers’ and borrowers’ needs and interest rate expectations. This will help them take full advantage of the opportunities created by the rate cut, even if further rate changes do not occur immediately.”

 
Jatin Ondhia, CEO of Shojin Property Partners, said: “The consecutive months of target level inflation were clearly enough for the Bank of England to finally give the green light to reduce interest rates. The decision is a key indicator of the growing sense of economic stability and will likely open up new opportunities for investors as they reassess how to manage their portfolios.

“The impact of the high inflationary-high interest environment of the last couple of years cannot be underestimated. Homeowners have faced higher mortgage rates than at any point since the financial crisis, while developers have found it harder to access much-needed finance. Today’s decision hopefully signals a clear transition away from this challenging period.

“Looking ahead, alternative investments are likely to play an increasingly important role in investors’ portfolios. While the base rate has now fallen, it’s from a 16-year high – interest rates still remain significantly above the levels that many landlords had become accustomed to before the hikes. As such, diversification will remain a prominent trend going forward, with a balance of savings products and lower-risk investments alongside higher-risk opportunities to provide potential for greater growth.”

 
Ben Nichols, Interim Managing Director at RAW Capital Partners, said: “The Bank of England clearly feel as though the perils of high inflation have been addressed by their action on interest rates and the rate hiking cycle has finally come to an end, allowing homebuyers, investors and BTL landlords alike to take a breath and plan their strategies with greater confidence and freedom. After rates reached their highest level in 16 years, today’s decision will provide much-needed relief, and I expect to see an uptick in activity in the UK property market as a result.

“Recently, sellers have flocked to put their properties on the market, and estate agents have noted an increase in buyer demand. What’s more, official figures show that house prices have grown for three consecutive months, while mortgage approvals have held steady near their highest level in 18 months. This indicates that the market was stabilising well before today’s rate cut. In this context, the additional impetus from the MPC today is likely to encourage hesitant investors and buyers to resume their investment plans.

“However, while we can celebrate a rate cut after two years of hikes and pauses, it is important to remember that rates are still very high in comparison to where they have been in recent memory. For a surge in activity to materialise, brokers and their clients must be equipped with the tools they need to confidently execute their investment plans. Lenders must recommit to offering a wide range of bespoke and flexible financial products to support the property market’s continued recovery.”
 
UK interest rates cut to 5% but further reductions will be slow
 
Today’s BoE interest rate decision was always going to be a close call and so it proved. Ultimately the balance of the rate setting committee at the BoE opted to make a cut for the first time in over four years – by Rob Morgan, Chief Investment Analyst at Charles Stanley.

Looking at the inflation data there is perfect logic to this. Following almost three years of above-target rises, inflation has fallen to 2% in the past two months, and this more subdued picture overall was enough to convince the balance of voting members of the MPC the coast is clear to start the rate cut journey.

However, the benign façade of headline inflation masks more complex and concerning trends. Almost all the heavy lifting has been done by falling goods prices, while in services the inflationary embers continue to burn and this could mean further cuts are limited.

Services inflation has remained stubborn thanks to sensitivity to robust wage increases, and both are rising at an annual 5.7% according to the latest readings. Until these embers show signs of dying out more concertedly the BoE is going to have a problem justifying more significant rate cuts.

While wage pressure could ease, there are also risks they could re-accelerate. Public sector workers have recently been granted pay rises, while the 9.8% increase to the living wage in April continues to inflate the year-on-year numbers. Meanwhile, although wage pressures could ease further, there are also risks they could re-accelerate as public sector workers are granted pay rises and increases to minimum wages in the spring inflate the year-on-year numbers.

Economic growth has also been a little stronger than anticipated, adding to the inflationary brew and the likely reticence of MPC members to make more significant cuts. GDP grew by 0.7% in the first quarter of this year, or 2.8% annualised, as the economy rebounded from a mild recession in the second half of 2023. Consumer confidence has so far held up despite the rapid increase in interest rates, and policymakers will not wish to risk a fresh resurgence in household spending rekindling price rises.

Many households and businesses will be hoping for further interest rate cuts, which would more significantly relieve pressure on those with variable rate mortgages in particular. However, cuts will only be fine tuning rather than deep, owing to the stickiness of inflation and wage growth. It will therefore be a case of continuing to battle against high borrowing costs relative to recent history.

Overall, following today’s more we will likely see a shallow trajectory of cuts, perhaps at a roughly quarterly pace, towards the 4% level next year. There could be a faster cutting cycle only if growth disappoints or inflation becomes more firmly subdued, which looks unlikely.
 
Andy Mielczarek, CEO of Chetwood Financial, said: “The Bank of England’s long-awaited rate cut has finally arrived, and it’s sure to prick up the ears of savers and mortgage holders. Ultimately, today’s decision has been on the horizon for a while, and whilst it doesn’t dramatically change the outlook, it may profoundly impact the decisions many people make in the coming weeks and months.

“With savings offers destined to follow suit and the cost of living still at dangerously high levels, any further loss of income will hit hard-working families up and down the country. Therefore, Britons must act now to get the best returns on their hard-earned cash by choosing higher interest fixed rate bonds before rates fall.

“However, the news will be a long-awaited relief for consumers holding flexible or variable mortgages. The central bank’s decision to reduce the base rate means many borrowers must use their increased scope to invest some of the money they get back from lower repayments into building their cash reserves.”
 
Ben Thompson, Deputy CEO, Mortgage Advice Bureau, said: “This decision could’ve gone either way, but the Bank of England has rolled the dice and now finally has sufficient confidence to cut rates for the first time since 2020.

For homeowners and those who’ve been looking to get on the property ladder, the past few years have been tough, but there are signs of it already changing. Rates on mortgage deals have been falling, and it’d be feasible that more cuts will follow. For those looking to buy, now is the time to seek advice and get mortgage ready.”