The Bank of England held rates at 5.25% today, afraid to rock the boat at a time when the economy and job markets appears fragile, according to experts.
A status quo approach was always the expected result of today, but some are now predicting that we have reached the end of the road on rate rises.
Rob Morgan, chief investment analyst at Charles Stanley, said: “Cracks have been appearing in the economy and the jobs market, and many inflation indicators are moving downwards as anticipated, so the Bank can justifiably adopt a wait-and-see stance at this point.”
Although he warned that with inflation “well above” the 2% target and wage growth still elevated, “a further rate hike cannot be ruled out in the coming months”, the “more likely scenario” is that we have already reached the “interest rate summit” and a “long plateau” is now on the cards.
This view was echoed by Rachel Winter, partner at Killik & Co, who said: “The news of rates staying the same indicates that we may have already reached the peak of the interest rate cycle, which will allow households to breathe a collective sigh of relief.”
Lindsay James, investment strategist at Quilter Investors, noted that unlike in the US where a more robust economy has “kept the possibility of a further rate rise on the table”, in the UK it is more likely that the peak of interest rates “has now been reached”.
From a real world view, Myron Jobson, senior personal finance analyst at interactive investor, said the news will be beneficial to the 2.2 million homeowners on variable rate mortgages, who have been on a “swashbuckling ride” during the rate hike cycle.
“A hold in the Bank of England’s benchmark rate could also bode well for those in the market for a mortgage,” he added, although any further fixed mortgage rate cuts could be modest for now.
For savers, those waiting to grab the top rates are encouraged to do so as soon as practicable as banks and building societies reduce their rates in anticipation of future cuts. The withdrawal of NS&I’s market leading one-year fixed rate savings accounts at the start of October is a good example of this.
“Those who can afford to put money away for at least five years or more should consider investing for the potential of long-term inflation-beating returns that far outstrip savings rates,” Jobson said.
For investors, Lindsay James, investment strategist at Quilter Investors, said the end of the interest rate hiking cycle could be a good sign, especially if we are closer to rate cuts than future rises.
“The subsequent cuts can often bring about very strong returns. While markets may not be shooting the lights out, remaining invested over this period is going to be crucial,” she said.
Winter was less confident however, encouraging investors to keep a diversified portfolio to help offset any impact on specific sectors or holdings, while noting that gilts remain an “attractive option” for investors seeking an alternative to stocks.
The Bank of England followed in the footsteps of its US counterpart. Last night the Federal Reserve paused rates at between 5.25% and 5.5% with its members acknowledging the effects of policy tightening are likely to slow the pace of economic growth.
Whitney Watson, co-head of fixed income and liquidity solutions for Goldman Sachs Asset Management, highlighted that this was despite the US economy achieving one of its strongest quarters of growth in 20 years and inflation remaining above target.
“Tighter financial conditions, led by higher long-term interest rates, alleviated the need for a further rate hike,” she said.
However, it was not all plain sailing. Neil Birrell, chief investment officer at Premier Miton Investors, noted that the language used in the statement “is interesting”, with members suggesting they expect tighter financial conditions to slow the economy.
“The read across from that must be that they expect inflation to dampen as well. There can be no doubt that they stand ready to act if needed, however it does seem that ‘so far so good’ is the outcome of their policy measures for now,” he said.
Lots will depend on the data for both the labour market and inflation, with future hikes on the table should the economy continue to remain resilient and price rises prove sticky.
Meanwhile, earlier this week the Bank of Japan (BoJ) introduced some flexibility into its conduct of yield curve control (YCC), with an upper bound of 1% for 10-year Japanese government bond yields “as a reference”, even though the target remains 0%.
The BoJ said on 31 October that it “will patiently continue with monetary easing” and “control the yields mainly through large-scale Japanese government bond purchases and nimble market operations”.
June-Yon Kim, head of Japanese equities at Lazard Japan Asset Management, said the BoJ has embarked on a “policy normalization path”. In light of continued inflationary pressures, he expects further policy adjustments towards the end of this year or in early 2024.