Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “With Donald Trump in the UK on a state visit, the Bank of England’s MPC decision to hold rates comes at a time when there’s more focus than usual on the UK economy – and at a moment of economic deviation from our transatlantic cousins. The Bank faces a difficult balancing act - inflation is currently at 3.8%, significantly higher than the 2% target, and it’s forecast to climb to 4% in September’s data. This keeps significant pressure on British households and policymakers alike. The fact that the decision comes just a day after the Federal Reserve cut US interest rates underlines a potential divergence in policy, reflecting the pressures and priorities facing each central bank. While the two banks are operating in different environments, it also raises questions about how long the Bank of England can resist following the Fed, particularly in the context of the UK’s fragile growth outlook. For UK borrowers, today’s hold means repayments remain elevated, particularly for those on variable mortgages or approaching the end of fixed-rate deals. For savers, the outlook is more mixed: cash accounts may still look attractive now, but with inflation above target, real returns are at risk. That makes long-term planning through ISAs and pensions more important than ever to help build long-term financial security.”
Rupert Watson, Global Head of Macro and Dynamic Asset Allocation at Mercer, said: The Bank’s Monetary Policy Committee held interest rates at 4%. The Bank signalled further cuts may happen, but they were concerned about persistently high levels of inflation and wage growth. We expect UK inflation to fall back to target by the end of 2026 as soft economic growth leads to further weakness in the labour market and lower wage growth. We expect the Bank to cut interest rates further over the next few quarters. The Bank also announced it would reduce the amount of gilts it sells as part of its quantitative tightening program and also focus its sales at the short end of the curve. Longer dated gilts have been weak with some blaming the Bank’s active sales for some of this weakness. From a tactical perspective we are overweight long dated gilts. We think the UK isn’t facing a fiscal crisis and that inflation, wage growth and interest rates will fall over the next 12 months.
Simeon Willis, Chief Investment Officer, XPS Group: “There was no expectation of a rate cut today, with UK inflation still well above target and set to rise further. This contrasts with the US which saw a 0.25% interest rate cut yesterday, where inflation is almost 1% lower. For pension schemes, the impact will be minimal, as long-dated gilt yields and inflation expectations are moving somewhat independently of short-term rate decisions and inflation prints. Defined Benefit pension schemes have generally been benefiting from a wave of rising long dated gilt yields, needed to attract new gilt investors given that pension scheme demand for new issuance has likely passed its peak. However the dynamics of the gilt market has varied considerably across different maturities. Short end yields have been tethered by the Bank rate, whereas long dated yields reached their highest levels this century in early September with 20 years gilt yield reaching 5.7%, and are currently sitting just under this recent high watermark. In further contrast, at the hyper long end beyond 50 years, there is a rump of pension benefits that fall so far into the future that there isn’t even a gilt that can be bought to match them. This combined with a market expectation for reduced future long dated issuance, has propagated demand for the longest maturity gilts available which remain relatively expensive compared to the rest of the gilt market. Overall schemes are benefiting from higher funding levels, but volatile gilt dynamics make managing liabilities a choppy ride.”
Chris Arcari, Head of Capital Markets, Hymans Robertson says: “The Bank of England’s (BoE) decision to hold rates at 4.0% pa doesn’t come as a surprise for markets, especially following yesterday’s inflation print of 3.8% for August. The BoE remains caught between two competing forces: inflation that’s easing but still elevated, and growth that’s tepid at best. While headline CPI has come down, services inflation and wage growth remain sticky, complicating the path to rate cuts. The market continues to price in one final 0.25% pa cut this cycle, potentially taking the bank rate to 3.75% pa. With inflation progress stalling and the economy showing only modest momentum, the Bank faces a difficult balancing act: ease too soon and risk reigniting price pressures; hold too long and risk choking off recovery. The more interesting element of today’s meeting is the bank’s decision on whether to reduce the pace at which it is reducing its stock of gilt purchases. The BoE is letting its holding of gilts run down, a process known as quantitative tightening, through a combination of naturally letting gilts mature and, unlike other major central banks, actively selling gilts. The Bank is currently reducing its stock of gilts at a pace of £100bn a year, with the balance of gilts not naturally maturing in any year being made up for with sales of bonds into the market. Economists expect the Bank to reduce the pace of balance sheet reduction to around £72bn per annum. Reducing the proportion of gilts sold into the market should reduce the upwards pressure on long-term yields as these sales currently compete with Gilt sales from the DMO. However, risks in the near-term around this announcement are two sided: disappoint on the scale of reduction and yields might rise. Do more than the market expect and yields might fall.
George Brown, Senior Economist, Schroders: "With inflation heading in the wrong direction, there was no question that the Bank would be on hold today. But while markets are betting on rate cuts resuming next year, we remain doubtful this will materialise.
"In our view, the balance of risks is drifting towards renewed tightening given persistent domestic inflationary pressures. We continue to expect rates to remain on hold this year and next, but we can’t rule out the possibility that the Bank’s next move will be up, rather than down. A slowdown in quantitative tightening from £100 billion was clearly flagged, the only question would be to what extent. The Bank's announcement that it will allow £70 billion of gilts to roll off its balance sheet was broadly in line with our expectations, albeit meaning that active gilt sales will have to step up to £21 billion."
|
