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Bank of England holds Interest Rates at 5.25 as Inflations Falls

Rate Cuts for August Likely Scenario

The Bank of England decided to keep interest rates unchanged today, but hinted at a possible rate cut in August. Analysts predict a possible rate cut next month as signs of easing inflation emerge. The decision was finely balanced, with the vote split at 7-2. The pound weakened in response to the news, with markets anticipating an August rate cut.

The MPC vote was to keep its key interest rate unchanged at 5.25%, which is at a 16-year high. This decision comes amidst a backdrop of other central banks in Europe lowering their borrowing costs such as the ECB and the Swiss central bank. The BOE remains cautious about reducing rates due to concerns about inflation, specifically on the service sector, and the impact on the economy post the recent general election.

Market analysts will be closely monitoring future economic data to gauge the likelihood of a rate cut in August. The BOE is cautious about potential rate cuts due to inflation and economic conditions. In short, they are worried about the rising prices in the services sector and that inflation may be pushed higher than the 2% target towards that later part of this year.

Key Points:

  • Bank of England kept interest rates unchanged today but hinted at a potential rate cut in August. The market sees the probability of an August cut at 40 to 50% chance.
  • Analysts foresee a rate cut next month due to signs of easing inflation. The Bank acknowledged progress towards the 2% inflation target but left the door open for a possible rate cut in August.
  • However, uncertainty remains about the timing of a potential rate cut, with some expecting it at the next meeting on August 1, while others looking towards November.
  • The decision was finely balanced, with a 7-2 split among voters. Only two of the nine MPC members voted to reduce rates to 5%.
  • The pound weakened following the announcement, as markets increased bets on an August rate cut. In short, expectations of a cut in August and the weakness of the UK economy are factors.

Prime Minister Rishi Sunak expressed disappointment at the decision, as he had hoped for a rate cut to support the economic recovery. The Labour Party is expected to win in the July 4th election. As of yesterday, Labour had a lead of 41.9% versus 21.3% for the conservatives. The FT Polls estimates that Labour would win around 450 out of 650 seats in the House of Commons. With a Labour win expected, there are likely to be changes to tax policy in the UK.

On the housing front, the UK saw an increase in mortgages in arrears, reaching an almost eight-year high in the first quarter of 2024. This rise is attributed to high borrowing costs impacting households. While the figures highlight challenges for voters and Prime Minister Rishi Sunak’s campaign, experts believe the situation is serious for individuals but not yet a systemic risk to the housing market. Mortgage rates rose sharply between late 2021 and 2023 due to interest rate hikes by the Bank of England but have since eased slightly. Many households are expected to face higher mortgage costs as fixed deals from previous years expire.

Arrears are still low compared with their all-time high of 3.64 per cent in the first quarter of 2009, during the global financial crisis. This figure rose to 1.28% according to the Bank of England. The highest since 2016, where it stood at 1.24%. Since late 2021 to 2023, the BOE raised rates 5.25%, a 16-year. Most fixed home loans in the UK are for 2 or 5 years, thus the reset risk when these fixed loans expire.

The rise in arrears poses challenges for voters and the governing Conservative party ahead of the general election. While serious for individuals, experts believe it does not currently pose a systemic risk to the housing market.

Potential Impacts: The increase in mortgages in arrears could have ripple effects on the broader economy. If more households struggle to meet their mortgage payments, it could lead to a rise in repossessions and forced sales, putting downward pressure on house prices. This, in turn, may affect consumer confidence and spending as homeowners feel less wealthy.


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