Investment - Articles - Comments as Bank of England holds interest rates at 3.75%

Chris Arcari, Head of Capital Markets, Hymans Robertson says: “The Bank of England's (BoE) decision to leave the base rate unchanged today at 3.75% pa was broadly expected. While headline inflation rose to 3.1% in August, core inflation remained unchanged at 2.6% and wage growth eased to 3.9%, consistent with further loosening in labour market conditions and reducing the risk that higher energy prices trigger broader second-round inflation effects. Inflation remains above target across most major economies, while renewed tensions in the Middle East have pushed energy prices higher and reinforced expectations that policy rates may need to remain restrictive for longer. Although central banks would typically look through temporary supply shocks, underlying inflation remains elevated and economic activity has been more resilient than expected. While bond yields have fallen following today's announcement, the substantial rise in market yields over recent months has already contributed to tighter financial conditions and may partly reflect expectations that neutral interest rates are higher than before the pandemic. Together, these factors support a cautious approach to monetary easing across major economies. Further rate hikes cannot be ruled out, although the scope for additional tightening appears limited given already restrictive policy settings. We therefore doubt the Federal Reserve's recent rate increases mark the start of a prolonged global tightening cycle. The European Central Bank (ECB) has already raised rates twice this year, while the hurdle for renewed rate increases in the UK appears relatively high given weaker domestic growth conditions. Arguably the more important aspect of today's meeting concerns the pace of quantitative tightening (QT) over the coming year. By reducing the pace of active gilt sales to £20bn per annum, the Bank has materially slowed and smoothed the unwind process, reducing the amount of duration likely to be transferred directly to private investors and potentially easing some of the pressure on longer-dated gilts. At the time of writing, gilt yields had fallen following the announcement, with the largest moves occurring at longer maturities. With the Government's October Budget expected to increase gilt issuance, the interaction between BoE gilt sales and additional government borrowing has become increasingly relevant for investors. The Bank's decision to reduce active gilt sales to £20bn per annum should help alleviate concerns about gilt market supply, particularly as the Government is expected to increase issuance. Against this backdrop, while the outlook for policy rates remains finely balanced, we continue to believe markets may be pricing an overly restrictive path for UK monetary policy over the next 12 months.”

Maike Currie, VP Personal Finance, PensionBee, comments: “The Iran war isn’t the only inflation risk on the horizon. From extreme weather to AI-related pressure on energy and infrastructure, some of the forces that kept prices low for decades may be changing. That makes the path for interest rates unusually difficult to predict. “UK households are already struggling with surging petrol prices and rising grocery bills, while anyone looking for a job will tell you it’s still really tough out there. Meanwhile homeowners coming off cheaper fixed deals face a fresh mortgage squeeze. Raise rates and you pile more pain onto borrowers and businesses. Cut rates too soon and you risk energy costs becoming embedded in wages and prices.”

Hal Cook, senior investment analyst, Hargreaves Lansdown: "The Bank’s decision to hold was widely expected, despite headline inflation for August ticking up to 3.1%. But the Bank faces a tricky few months ahead. Headline inflation has risen and is likely to rise further from here, with October’s energy price cap changes expected to add upward pressure. At the same time, economic growth for June was higher than expected. But services inflation came in lower than expected, core inflation has been steady and recent labour market data was on the weak side. Markets still expect rate increases in the UK at some point, though that’s more likely to be 2027 than 2026. Much of it comes down to the oil price. If it remains above $100 a barrel, the case for a rate rise gets stronger.”

Dominic Grinstead, CEO at MetLife UK, comments: “While the Bank Rate has been held today, swap rates - which influence the pricing of fixed-rate mortgages – remain elevated, putting continued pressure on mortgage costs. For those buying or coming to the end of a fixed-rate deal, a significant proportion of household income can be committed to keeping a roof over their heads, leaving little room for unexpected financial shocks. When mortgage repayments take up such a significant share of a monthly budget, families are left with little to no financial buffer. Our research shows that 28% of homeowners have already fallen into financial difficulty and missed a mortgage payment due to an unexpected illness or injury, and 20% have no savings to fall back on at all. Whether buying a home or remortgaging, higher monthly repayments leave households increasingly exposed if life takes an unexpected turn - making financial protection more important than ever”.