Chris Arcari, Head of Capital Markets, Hymans Robertson, said: “As expected, the Bank of England (BoE) has left rates unchanged at a 16-year-high of 5.25% pa this morning. Despite a small upside surprise in March’s release, year-on-year headline CPI inflation has continued to moderate in recent months, to 3.2%. Indeed, energy price falls and their interaction with the UK price cap, alongside goods and food price disinflation, mean comparable year-on-year headline CPI is likely to fall below target in the coming months.
“However, year-on-year core inflation, which excludes volatile energy and food prices, is running at 4.2% year-on-year – more than double the BoE’s target. There remains uncertainty over how quickly inflation will reach its target on a sustainable basis with services and wage inflation both running at 6% year-on-year and slowing less sharply.
“Nonetheless, we continue to expect the BoE to cut rates this year. We expect the bank to tread cautiously by reducing rates slowly to less restrictive levels given the massive overshoot of inflation in 2022 and 2023. Markets have also coalesced around this view in recent months – markets were somewhat optimistically implying between six and seven 0.25% pa interest rate cuts at the start of the year. These expectations have now moderated to, what is in our opinion, a more realistic expectation of between one and two 0.25% pa cuts in 2024.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “Despite inflation falling closer to the Bank of England’s 2% target, interest rates remain stubbornly high, and held at 5.25% where they’ve been since last August. This announcement to hold comes against a backdrop of high wage growth and service sector inflation, and the United States Federal Reserve, which often influences decisions taken by central banks around the world, showing no sign of cutting rates either due to persistent inflation in the US. Several lenders here have recently raised their two and five-year fixed rate mortgage deals, factoring in a delay to expected rate cuts. With meetings in June and August, it’s possible that we’ll see the Bank of England deliver a base rate cut then, especially if inflation falls below 2% in May, June or July. In the meantime, what’s certain is that the current higher-interest rate environment is here to stay, for at least another month.
“High interest rates have an obvious impact in the here and now, but a prolonged spell of heightened borrowing costs could also complicate people’s plans for later life. As rates have risen, so has the temptation to take out ever longer mortgages and we’ve even seen the introduction of the 40-year mortgage. This might make sense for some, however it’s worth considering the potential retirement implications. For those starting out, the average first-time buyer in the UK is 34*, meaning that they would be 74, 6 years beyond their current expected state pension age if they took out a 40-year mortgage. Before making the decision, people should use an online pension calculator to check if their current level of pension saving covers the cost of mortgage repayments in retirement, as it’s highly unlikely that the state pension of the future will be sufficient to cover them as well as general living costs.”
Danny Vassiliades, Partner at XPS Pensions Group, commented: “Though the Bank of England has maintained base rates at 5.25%, this is the first time in almost a year that more than one of the nine committee members have voted for a cut. This signals a clear shift towards lower rates, with many analysts already looking ahead to the next committee meeting in June for a possible rate cut.
Pension schemes should review the suitability of their funding and investment strategies to ensure that any future, unexpected rates cuts don’t adversely impact the current record funding levels that have seen around half of all DB pension schemes being fully buy-out funded.”
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