There is some anticipation that the first interest rate cut could come as early as this week, but many economists are now expecting it later in the year.
The base rate has been held at 5.25% since August 2023, with the committee most recently voting to hold the base rate at this level at its June meeting. It’s the highest the base rate has been since December 2007 when it stood at 5.5%, having dipped to below 1% for more than 13 years between 2009 and 2022.
Since late 2021, the Bank of England has been in an interest rate hiking cycle as a means to combat inflation.
The Consumer Prices Index (CPI) measure of inflation rose to double figures after the pandemic and the Russian invasion of Ukraine. After peaking at 11.1% in October 2022, inflation started to slow and hit the bank’s 2% target in May, remaining at this level in June.
Currently, the markets are pricing in a 45% chance of a rate cut in August, indicating that the decision could be finely balanced.
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Capital Economics recently shifted back its forecast for the timing of the first interest rate cut to September, citing the latest round of inflation and wage figures. Economists at the group previously predicted an August base rate cut.
Meanwhile, Kevin Mountford, co-founder of savings platform Raisin UK, said: “The headline inflation rate slowed to 2% in May and remained steady in June. However, core and services inflation is still a concern at 3.5% and 5.7%, respectively. The services sector represents about 80% of the UK’s economic output, so the Bank of England closely monitors this measure.
“It’s uncertain whether the recent general election result will influence the Bank of England’s decision-making. The MPC is responsible for making independent decisions but may wait until the new Government publishes its first Budget statement. Chancellor Rachel Reeves has indicated that this could happen as early as September.
“Lastly, experts are using fairly hawkish language when discussing services inflation, suggesting that August might be too early for UK policymakers to make a first move.”
‘No definitive steer from latest economic data’
Richard Hunter, head of markets at Interactive Investor, said: “At present, the consensus is evenly split between a cut and a no-change decision, with the latest economic data having seemingly been unbale to provide a definitive steer.
“A cut at some point this year is nevertheless expected, although the timing remains on the flip of a coin.”
Data published by cash savings platform Flagstone shows that the proportion of financial advisers and savings professionals at banks who believe the base rate will be cut at the next Monetary Policy Committee (MPC) meeting on 1 August has jumped significantly to just over half (52%). However, they remain cautious about significant cuts, with 82% not expecting the base rate to drop below 4.5% by the end of the year.
The Flagstone Base Rate Poll surveyed 136 independent financial advisers, wealth managers, and senior savings professionals at banks and building societies.
The survey found that 52% of respondents expect the base rate to be cut from 5.25% in August, marking a significant shift in opinion from the last poll in June, when 30% anticipated a cut.
Despite this shift, savings professionals and advisers are largely split on their predictions. A minority number (14%) are not expecting a cut at all in August or September.
‘Multiple factors are creating indecision’
Simon Merchant, CEO of Flagstone, said: “It’s no wonder expectations regarding the base rate cut are so divided. Multiple factors are creating indecision. While some believe continued inflation control and wider economic conditions support a rate cut in the near term, others emphasise the need for caution and further stability before making such a move.
“The consensus seems to lean towards a potential rate cut, but not necessarily in August, with many predicting a decision might be deferred to later in the year.”
Mortgage lenders act in anticipation of base rate cut
A cut in the base rate could help boost the property market by upping the number of mortgage approvals.
Jonathan Samuels, CEO of Octane Capital, said: “Now that the political dust has settled we expect to see the nation’s buyers returning to the fold and this increase in activity should only strengthen as the prospect of an interest rate cut looms ever closer.
“We’re also seeing lenders act in anticipation of a reduction in the base rate, with the average daily swap rate already starting to decline in recent weeks. This is a leading indicator that the mortgage rates currently on offer could soon start to reduce, if they haven’t done so already.”
Barclays, TSB and Nationwide have all reduced rates in the past week or so.
