Chris Arcari, Head of Capital Markets, Hymans Robertson says: “As markets expected the Bank of England (BoE) have held rates at 4.5% pa today; with headline CPI inflation rising more than expected, to 3.0% in January, and forecast to increase this year, many had predicted this hold. It’s true that some of the predicted rise in inflation is due to temporary factors, such as energy prices, but we think persistent domestic inflation pressures will influence cautious BoE messaging about the pace of future cuts. Average weekly private-sector wage growth (excluding bonuses) came in at 6.1% year-on-year in the three months to end January. This, in turn, has kept upwards pressure on service-sector inflation, which accelerated to 5.0% year-on-year in January. Additionally, while survey data point to employers cutting their hiring in response to the employer’s national-insurance increase announced in the October budget, the data also suggest that at least as many businesses intend to raise prices in response, which will further contribute to price pressures. The markets expect two more 0.25% pa cuts this year. We wouldn’t disagree strongly, given that rates remain in restrictive territory and the BoE sets policy based on inflation’s predicted path over the next few years, as opposed to where it is now. However, given the recent upside surprises in realised inflation and the upgrades to inflation forecasts, the UK’s central bank will be more cautious about consumers’ inflation expectations feeding back into wage negotiations and, therefore, prices. For these reasons, we think the risks skew towards the BoE delivering fewer rate cuts.”
Simeon Willis, Chief Investment Officer at XPS Group said: “The CPI inflation figures went in the wrong direction since the last rate cut at the start of February, and whilst the Bank has a secondary objective of supporting growth, which is currently fragile, bringing inflation down to target is its primary objective. Whilst avoiding a rate cut might appear beneficial for pension schemes – given that lower interest rates generally increase liability values- long-dated gilt yields have been somewhat insensitive to the direction of Bank rate recently. Current sky-high gilt yields are being propped up by other factors, such as the pipeline of gilt sales. Long-term inflation expectations have been moderate and declining, and pension schemes are typically well-hedged. This means that for many schemes it’s of the greatest importance for the Bank rate to promote economic growth. This will be important in maintaining the UK’s stability and supporting asset markets like UK corporate bonds, in which pension schemes are heavily invested. As such, the constraint that above-target inflation is placing on the speed of interest rate reductions could be seen as undesirable for many pension schemes.”
Natalie Brain, Partner in LCP’s investment team commented: “UK inflationary pressures persist, with the latest available CPI for the 12 months to January up 3.0%, well above the Bank’s inflation target of 2%. And while figures released today by the ONS suggest some cooling in the labour market, wage growth for the three months to January fell only slightly compared with December’s figure, down from 6.1% to 5.8%. Despite the almost unanimous vote, the Bank of England is between a rock and a hard place. The UK’s growth outlook is poor – growth forecasts for 2025 have been reduced amid escalating trade tensions following President Trump’s various and varying tariff threats. While a cut to interest rates could have acted as a useful economic shot in the arm, the Bank clearly decided that the combination of sticky inflation and wage growth was the bigger concern. All eyes will be on the February CPI print due on 26 March, coincidentally the same day as the Chancellor’s Spring Statement.”
Lily Megson, Policy Director at My Pension Expert, said: “The ongoing geo-political turbulence coupled with domestic tax reforms continue to fuel economic uncertainty; the Bank of England has clearly decided not to throw petrol on the flames. Whilst the decision carries a hint of stability, it does little to ease the financial strain on savers. The cost-of-living crisis lingers, and with inflation remaining elevated – with possible increases announced next week – the value of Britons’ hard-earned savings continues to erode. At the same time, uncertainty around future policy changes makes it increasingly difficult for people to plan their long-term finances with confidence. With no clear direction on savings, pensions, or retirement support, many will be left second-guessing their next steps. While the Central Bank has avoided adding fuel to the fire, the government must now take decisive action. Simply waiting for interest rates to cool inflation is not a plan. Savers need consistency and support to restore confidence in their financial future. With the Chancellor’s Spring Statement fast approaching, we can only hope for a renewed focus on ensuring people can save enough for a secure financial future. A good place to start would be improving access to financial education and independent advice because at the moment, too many people are left without the guidance they need to face the current uncertainty.”
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