Dec
2024
‘The Autumn Budget has proved inflationary’: Experts respond to interest rate freeze
DIY Investor
19 December 2024
Bank of England holds rates amid cautious approach
Adam Vettese, market analyst at investment platform eToro, says: “There was no surprise that rates were held by the Bank of England today as this was very much priced in. What was notable is there were 3 dissenters who voted for an immediate cut. This contrasts to Andrew Bailey continuing to favour a more cautious approach due to the slightly hotter inflation print and also the uncertainty over how Labour’s first budget unfolding will affect the economy.
“The concerns over growth will put further pressure on the government after an already widely unpopular budget which has burdened many businesses with additional tax burdens. We may see bets on the initially expected 4 rate cuts next year reduced if inflation remains sticky, but the 6-3 vote surprise conversely could also see pressure applied to maintain the rate cut trajectory. Sterling dipped as a result, with the vote being seen as a dovish sign.”
UK interest rates on pause as BoE assesses Budget fallout
Rob Morgan, Chief Investment Analyst at Charles Stanley
The stubbornness of services inflation driven by strong wage rises and heightened uncertainty surrounding the outlook were enough for Bank of England policymakers to reach for the interest rate pause button today.
Business Budget response the critical factor for inflation in 2025
With wage inflation remaining high, feeding into services costs, and a reacceleration of energy prices, the BoE is wary of cutting interest rates too much too soon, especially now fiscal policies revealed in the Budget could add fuel to the inflationary fire into the New Year.
There’s a lot to monitor for BoE economists, not least the trade-offs businesses will be making between growth, employment and pricing in response to the Budget.
The additional costs for employers in terms of higher national insurance and minimum wages looks set to reinforce the trend of escalating costs in the services sector. Although employers might take some of the hit with lower corporate margins, much of the impact could take the form of higher consumer prices.
The BoE will be carefully monitoring the corporate response, which could vary across different industries and individual businesses. Given the uncertainty it’s no surprise it wants to place more emphasis on a gradual approach focused on developing data rather than make any assumptions.
Further afield, there are inflationary concerns surrounding what Donald Trump’s reprise as US President might mean for global supply chains. Should he look to expand his tariff approach there could be a significant inflationary impact on global trade.
Interest rates will continue to fall but trajectory will be shallow
Previously, Governor Bailey stated that “interest rates are going to come down. I’m optimistic on that front”. This much still holds true, but when and by how much is very much in doubt.
An unusually broad spectrum of outcomes are in play, presenting a quandary for the BoE. On the one hand big government spending plans and additional costs for businesses could stoke inflationary pressures. On the other, it must be alert to the Budget weighing on confidence and dampening consumer and business activity.
As things stand there are too few signs of structural inflation problems receding for sizable or rapid cuts to interest rates to be made. This week’s blowout wages numbers and stubborn services inflation highlight the challenges of bottling up the inflation genie for good. Combined with the uncertain Budget impact yet to play out, it’s going to be hard for policymakers to be convinced to cut rates aggressively.
It remains highly likely the Bank will continue to follow its data dependent path and cut rates in the New Year, perhaps as early as its first meeting in February, but we expect only a gradual withdrawal of more restrictive policy over the course of 2025.
Rachel Winter, Partner at Killik & Co, said “Investors and consumers in the UK will be disappointed that the Monetary Policy Committee has not given them a Christmas gift of a final rate cut in their last decision of 2024. The Autumn Budget has proved inflationary, and this means that interest rates will likely need to remain at higher levels to keep this inflation in check.
“The last few months have seen a number of dramatic events on the world stage which will be on investors’ minds, from the re-election of Trump in the States to a surprise declaration of martial law in South Korea, all of which serve as potent reminders of the importance of having a diversified portfolio that can weather any market shocks. As we move into 2025, now is as good a time as any to reflect on the key fundamentals of successfully investing to build wealth. A good New Year’s resolution would be to invest little and often into a diverse range of asset classes and sectors. Speaking to a financial adviser would be a good idea for those who are interested in forming a comprehensive strategy that is tailored to their specific goals.”
Ben Thompson, Deputy CEO at Mortgage Advice Bureau, said:
“We might not be rockin’ around the Christmas tree with joy, but another interest rate hold means we step into Christmas on the back of a positive year for buyers. Even though rates haven’t fallen as much as we’d have liked, the situation is much improved compared to 2023. Mortgage rates are now more affordable, buyers have confidence again, and the housing market has shown resilience.
“For those looking to buy in 2025, the future is bright. The base rate should continue to fall – even if it takes a bit longer – and mortgage rates could follow. We’ve seen some lenders repricing upwards recently based on slight volatility in the Swap Market, but rates are mostly holding steady. For those hoping to hang their stockings in their own home next Christmas, now is the time to get mortgage ready by seeking advice and taking the first steps on the journey to homeownership.”
Ross Turrell, Commercial Director at CHL Mortgages, said: “The Bank of England’s rate cuts have injected much-needed positivity into the mortgage and property markets in recent months. But, with the CPI ticking up again yesterday and concerns lingering around the longer-term impact of the Autumn Budget on inflation in the UK, a rate cut today was always unlikely.
“The news might trigger some negative responses, particularly among property buyers holding out hope for lower mortgage rates. However, Governor Bailey has strongly indicated that the base rate could be cut by 1% across the next 12 months, which will likely result in a significant surge in buyer demand and market activity in the new year. That is a promising outlook, and we must be ready as lenders to respond by engaging with brokers and their clients.
“The ability to navigate what remains a complex investment landscape will be crucial as the market continues to evolve in 2025, making access to the right expertise and support just as important as the right products and rates. This is an opportunity for experience to shine through, so it’s essential that lenders go above and beyond to meet the needs of individual brokers and borrowers, in turn providing the foundations for the property market to flourish next year.”
Paresh Raja, CEO of Market Financial Solutions, said: “The Bank of England has long urged against lowering interest rates too quickly, so following November’s decision to cut the base rate, it was always highly unlikely that the MPC would do the same today. But that should not be seen as a negative. Instead, we have to see the bigger picture and reflect on the progress we have seen across the property and lending markets in 2024.
“Yesterday’s data from the ONS underlined that house prices and rents are rising, while interest rates have started to fall and are expected to come down further next year. Meanwhile, from a political perspective, although new policies are creating challenges for landlords in the private rental sector, the fact that 2024 has brought in a new government with a sizeable parliamentary majority does bring stability after several years of turbulence. Put simply, the market is in a stronger position today than it was 12 months ago, and this lays the foundations for some exciting opportunities for lenders, brokers and property investors alike in 2025.”
Ben Nichols, Managing Director at RAW Capital Partners, said: “No early Christmas present, but a cut was largely out of the question given the ongoing inflationary concerns. Fortunately, the outlook for further rate cuts in 2025 is far more promising. Governor Bailey recently suggested that the MPC is preparing to implement up to four reductions to the base rate next year. Given that inflation is unlikely to rise as sharply or for as long as it did two years ago, another rate cut could be on the cards as early as February, which would provide the property market with a welcome shot in the arm.
“That said, higher borrowing costs will naturally weigh on property investors’ minds, even if underlying data relating to buyer demand and transaction levels is positive. Therefore, the onus remains on lenders and brokers to better support borrowers as they wait for the Bank of England to relax the monetary policy environment. I expect that flexible financial products, firm commitments, and transparent communication will continue to be vital qualities for lenders to provide in the months ahead as a result.”
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