Chris Arcari, Head of Capital Markets, Hymans Robertson says: “Inflation has come in lower than expected across the major advanced economies in November, including the UK. A decline in energy prices and moderation in food prices were the main drivers, but core inflation, which excludes both of these, also fell more than expected. This lends credence to market expectations that interest rates have now peaked and central banks will be able to reduce interest rates in 2024. However, high core, services, and wage inflation, and tight labour markets, particularly in the UK, support suggestions from central banks that they may be a little more cautious in easing interest rates in the near-term than markets currently expect. The market may have got a little ahead of itself with regards the scale of expected interest rate cuts in the near-term, particularly in the US and UK, but longer-term market-implied forward rates still look quite high relative to fundamentals.
“We think the peak impact of prior interest rate rises is yet to hit the major advanced economies, with global, and in particular, UK growth expected to slow to its slowest pace since the GFC, excluding 2020, in 2024. In this environment we retain a more constructive view on safer assets, such as cash and government bonds, and high quality credit, than we do for risk-assets, such as equity, property, and speculative-grade credit.”
Simeon Willis, Chief Investment Officer at XPS Pensions Group, commented: “Whilst the Bank has again held interest rates at 5.25%, pension schemes will be interested in market reaction to this and, in particular, whether any rate cuts could be more imminent than previously expected. Whilst gilt yields have closely tracked the increase in the Bank rate over the past year, the potential for gilt yields to fall from here is substantial.
The PPF’s “Purple Book” published last week estimated that aggregated UK defined benefit buyout surpluses stood at c.£150bn as of 31 March 2023. Schemes will be particularly keen to ensure that any knock-on impacts to long-term interest rates do not materially worsen the positive funding levels they’ve built up over the last couple of years.
Going into the new year, schemes may view now as a good time to review the appropriateness of their investment strategies and to ensure they are suitably protected against any potential adverse market movements. This will be particularly important for schemes where buyout is a realistic short-to-medium-term objective.”
LCP Investment Partner Paul Gibney commented: “A big question for 2024 will be if and when the Bank feels able to start cutting rates. Clearly, while inflation remains on a downward trajectory, MPC members believe more evidence of economic softening is needed before any monetary easing is warranted. Wednesday’s surprise announcement that the UK economy had contracted in October was not enough to tip the balance in favour of lower rates.
“While the slowdown may have brought forward the timing of rate cuts, market expectations remain that the Bank of England will cut rates later and more slowly than other major developed market central banks, given the more persistent pricing pressures that the UK economy faces. Exactly when that process starts has no doubt been further complicated by the US Fed’s indication in its post-meeting conference yesterday that it is likely to start cutting rates next year sooner than had previously seemed likely.“
James Lynch, fixed income investment manager at Aegon Asset Management: "The Bank of England kept policy rates unchanged at 5.25% today with 6 members of the MPC voting for this and three voting for a hike in interest rates.
"This was broadly expected but the tilt was that maybe one or two of the members that had been voting for hikes would change for a pause in light of the new softening in GDP data and loosening of the labour market.
"The interest rate market pre 12pm had moved to expect cuts starting to be priced by March to May 2024 meetings. On the back of this meeting I would expect that to be pushed back a few meetings now.
"Even though the BoE are sounding like they are resolute in keeping rates on hold ultimately they are beholden to the data, which we would expect to still weaken from here which means at some point in Q1 2024 they will at least have to talk about cuts."
Becky O’Connor, Director of Public Affairs at PensionBee: “A ‘hold’ decision offers welcome stability for pension savers and retirees alike, whether they are building up or drawing down their pensions.
For those approaching or in retirement who have found managing their retirement and withdrawal plans stressful because of market ups and downs, this stability in monetary policy direction might offer some respite.
Higher for longer interest rates, combined with a healthier and less volatile global stock market presents savers with a broader menu of options for how to grow their money over the long-term.
For people with retirement money tied up in savings, it will be important to keep chasing decent rates, as high-paying accounts may not hang around for long. This is particularly pertinent as previous PensionBee research found that half of retirees could be losing out due to low interest rate deals.”
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