Ben Farmer, Senior Investment Consultant , Hymans Robertson says: “Headline inflation may now be back at the 2% target, but this has mainly been driven by falling energy and food prices weighing on the year-on-year comparison. Good news for some, with the energy price cap falling, alongside the price of chocolate (among other things)! However, the Bank of England (BoE) pays closer attention to core inflation – stripping out the volatile energy and food measures – which remains elevated at 3.5%. Other measures that the BoE tracks closely, such as wage growth and services inflation, have also stayed high. As such, the BoE’s decision to hold the base rate steady at 5.25% was widely anticipated and is unlikely to move the dial in markets.
“At the start of the year markets were pricing in six or seven base rate cuts in 2024. After yesterday’s inflation release, this has moved to pricing in one 0.25% p.a. rate cut by the end of 2024, with another potentially to follow in early 2025. That doesn’t feel unreasonable given the Bank of England sets policy on where they think key measures of inflation are going, rather than where they are currently, and that central banks tend to look for more persistent evidence and data before cutting rates than they do when raising them.”
Marc Devereux, Head of Investment Consulting at Broadstone: He said: “The decision to hold rates at 5.25% will not have been a surprise for the market given wage and services inflation remains sticky. The election period reduces the usual additional guidance and commentary from the Bank of England, so market participants will be in a wait and see phase until the election is over and the next bank meeting in August.
“For scheme managers and pension scheme trustees, constant monitoring of their strategic positioning will remain important, especially with regards to inflation hedge ratios which are particularly sensitive to market rates.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “With the base rate held at 5.25% despite inflation falling to their 2% target, for now it’s bad news for borrowers, and particularly those who have a tracker mortgage or are coming to the end of a fixed mortgage deal. In contrast, people with cash-based savings are in a sweet spot, with price rises taking a smaller bite out of their savings while there’s still decent rates on the market.
“Despite this, it’s worth noting that any gains will still be marginal. Based on 2% inflation, a pot of £10,000 will be worth £10,189 in real terms after two years with an interest rate of 3%, or £10,588 with a 5% rate. For those with a greater appetite for risk investing, perhaps into a product like a stocks and shares ISA, offers a greater chance of substantial returns. If you’re able to take a longer-term view, saving into your pension is both incredibly tax efficient and has the potential to outpace inflation over a number of years due to the power of compound investment growth.”
Danny Vassiliades, Partner at XPS Pensions Group, commented: “Yesterday’s announcement that CPI inflation fell to 2.0% in the year to May 2024 marked the first time inflation has hit the Bank of England’s 2% target in almost three years.
Despite this, with private sector wage growth remaining high, inflation is expected to rise in the coming months, and with election campaigns firmly underway, the Bank has decided to maintain the base rate at 5.25%.
Given the fall in headline inflation, rate cuts could be on the horizon, with expectations of a cut as early as August. While this will be welcome news for many people’s finances, pension schemes should ensure their funding and investment strategies are prepared for any continuing uncertainty around the timelines of future interest rates."
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