Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “Despite speculation around the potential impact of Swiftonomics - Taylor Swift’s UK tour driving up live music and hospitality prices in June, and raising the headline figure - inflation has stayed at the Bank of England’s 2% target. This will fuel ongoing speculation that we’ll see an interest rate cut as early as August.
“If and when this happens, lower interest rates are likely to have two immediate impacts – easing the pressure on people paying back loans and mortgages, while leading to lower returns on cash based savings. As a result, it’s worth mortgage holders coming to the end of fixed rate deals keeping a close eye on new deals coming to the market, if they’re thinking of refixing. It could also be beneficial for people finding themselves with a bit of extra money as a result of lower interest payments considering prioritising longer-term investments like pensions. Investments have the potential to provide more substantial returns than cash savings, particularly in a lower interest rate environment, and pensions have the added advantage of being highly tax efficient. A little extra now could have a big impact in the future. “It’s all still speculation for now – but it’s always worth preparing for the possibility of changing economic conditions.”
Commenting on the Consumer Price Index June update, Chris Arcari, Head of Capital Markets, Hymans Robertson says: While UK headline CPI remains close to the Bank of England’s 2% target, this largely reflects declines in energy prices and their interaction with the Ofgem energy price cap. Core CPI (which strips out volatile components such as energy and food prices), has also eased, but at 3.5% year-on-year highlights some persistence in underlying inflation. This is further illustrated by services CPI, which though slowing, remains at 5.7% year-on-year.
“Furthermore, in addition to much better than expected growth and activity data, UK business surveys highlight wage increases, shipping costs and rising raw materials prices contributing to rising costs. This suggests services inflation is likely to remain sticky, while goods price disinflation has largely run its course. Indeed, headline inflation is actually forecast to start rising again, and reach 2.8% year-on-year by the end of the year.
“Nonetheless, lowering rates doesn’t necessarily mean the Bank of England is adopting a stimulative stance. Given recent falls in inflation, monetary policy has continued to tighten through 2024 despite base rate being held constant, via rising real rates. This despite the last rate rise coming in August last year. Put another way, still-elevated, but easing, underlying inflation pressures can be consistent with a gradual reduction in interest rates to slightly less restrictive levels.
“In light of recent positive growth data and signs of sticky underlying inflation pressures, markets have pushed back expectations for the first rate cut to the September MPC meeting. Markets now more or less fully expect two 0.25% pa rate cuts by the end of the year. Whether the BoE cuts rates in August or September, we think that the key point is that the pace of rate cuts is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.”
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