Why does the Bank keep holding interest rates?
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On 20 June 2024, the Bank of England (BoE) decided to hold interest rates at 5.25%, continuing the level since August 2023. This surprised some analysts who thought that the Monetary Policy Committee might finally lower rates now that inflation is sitting at the BoE target of 2%.
Why does the Bank keep holding rates despite successive falls in inflation in 2024? What can we expect for rates going forward, and what does all this mean for households and financial planning? Our Grantham financial planners explore these questions in more detail below.
We hope these insights are useful to you. To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
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Why is the Bank holding interest rates in 2024?
To help understand the Bank’s decisions, it is important to remember why interest rates and inflation are connected. As a general rule, the faster inflation rises, the greater the pressure to raise interest rates, and vice versa. This is because higher rates encourage more people to save money rather than spend it (which can be a big cause of demand-pull inflation).
The UK has experienced a gradual fall in the headline inflation rate in 2024. In the 12 months leading up to June, it now stands at 2%. This compares to 2.30% last month and 8.70% last year. However, the numbers obscure a more complex reality “under the bonnet” of the economy.
These percentage figures are drawn from the Consumer Price Index (CPI), which provides a monthly figure based on a weighted average of prices from a “basket” of goods and services. When the “volatile” components—i.e., food, energy, alcohol, and tobacco — are stripped out of the calculation, we are left with Core CPI, which tells a different story.
Here, core inflation rose by 3.9% in the 12 months leading up to April 2024. Whilst this is down from 4.2% in March, it is still riding above the BoE target. Moreover, inflation for services remains stubbornly high at 5.9% in May – down only a tiny amount from 6% in April.
What are the implications for you at home?
To summarise the above, the headline rate of inflation is at the BoE target, but the underlying rates of inflation – i.e. core inflation and serviced-based inflation – is still above target.
As such, the Bank is likely holding interest rates at 5.25% to avoid an outbreak of aggregate demand from consumer spending, which could send the CPI skyrocketing again.
This has mixed implications for households. On the one hand, this could be good news for savers. Interest rates could remain higher for longer, which could mean that regular savings and Cash ISAs may not drop their rates as quickly as some expect. However, homeowners may not have welcomed the BoE decision in June.
Over 1.5m homeowners are forecast to come off their fixed-rate mortgages in 2024. Many of these fixed-rate deals were set during “low-interest years” before late 2021 when rates started to rise in response to accelerating inflation.
As such, the longer the BoE holds rates in 2024, the more UK homeowners will face higher mortgage costs as their fixed-rate deals end. The knock-on effects also reach renters, many of whom occupy Buy to Let properties. Here, many landlords may decide to pass on higher mortgage costs to their tenants.
How can we move forward?
It is difficult to predict what will happen with interest rates. Some analysts have recently forecast a rate cut in September, although some expect this earlier in the summer. However, the stubborn rates of core inflation and services-based inflation may prove “stickier” than many people expect. In which case, the BoE could delay a rate cut beyond these forecasts.
This is a gentle reminder that wise financial planning is less about trying to “outguess” the markets and economy, and more about having a robust plan in place – ready to adapt to new conditions and circumstances. This helps you to be ready for different scenarios, rather than resting your plans on a scenario which may or may not transpire.
For instance, if you have a fixed-rate mortgage deal ending in 2024, how will your budget, savings and investments be affected if different potential interest rate levels change your repayments?
Fortunately, for retired people who own their homes outright, a continuation of interest rates at recent levels will be less of an issue compared to renters or those with mortgages. However, it may still be helpful to discuss different scenarios with your financial adviser.
For instance, if you are considering an annuity, how might the annuity market be impacted by different interest rate “landscapes” in 2024-25? If you hold savings and investments in different “vehicles” – e.g. regular savings, ISAs and pensions – how might interest rates affect your asset allocation and structure? Again, a financial adviser can help you work through these questions.
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01476 855 585
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