Laith Khalaf, head of investment analysis at AJ Bell, comments on the Bank of England’s August Monetary Policy Report: “An interest rate cut doesn’t help Rachel Reeves with the black hole in the country’s finances because it was already baked into the OBR’s economic forecast in March. There’s now probably only one interest rate decision before the Budget where a cut could provide a windfall for the chancellor, and markets are pricing in very little chance of any action from the Bank of England in September.
“The cut in interest rates also won’t move fixed rate mortgages down that much, again because it was already baked into prices. If anything today’s decision may push new fixed mortgage offers up a touch because so many of the rate-setting committee voted to keep rates on hold. Variable mortgages pegged to the base rate will of course fall on the back of this decision. Going forward things are looking brighter for mortgage borrowers, with base rate expected to fall to 3.5% by the middle of next year, but the market may be reassessing that prognosis as we speak.
“The Bank of England thinks inflationary risks have picked up in recent months and as a result the gradual and careful approach to interest rate cuts still prevails. But the fact there are so many hawks on the rate-setting committee will give markets pause for thought on how quickly interest rates will descend from here. That said, based on current interest rate expectations, CPI is still forecast to fall to 2% in the medium term, which provides some reassurance to the market that its existing pricing isn’t too wide of the mark.
“Pensioners have something to cheer in the latest set of forecasts from the Bank of England, which predict inflation will peak at 4% in September. That’s a favourably timed spike for the calculation of next year’s state pension, which takes the September CPI reading as one of the inputs of the triple lock. It’s possible that wage growth may trump inflation, and pensioners get an even bigger bump in their income. But if the Bank of England is right about inflation, then pensioners can look forward to a rise of at least 4% in their state pension next year. No doubt this will once again raise questions about the fairness of the triple lock, especially against a fiscal backdrop which suggests the chancellor is going to have to stick a shovel into taxpayers’ pockets again in the autumn Budget.”
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