Bank of England holds rate

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 9 May 2024. 

Prior to the Bank of England’s (BoE) latest Monetary Policy Committee (MPC) vote, markets had priced in the base rate being kept on hold at 5.25%. And that’s exactly what happened.

The fact that UK inflation remains well above the 2% target, left little room for manoeuvre for MPC voting members. That said, the vote wasn’t unanimous with 2 of the 7 voting members opting for a cut now. 

In reality, it was the messaging from the MPC, rather than the vote outcome, that was the major focus for investors. Consensus now points to a first UK rate cut in June.

Nearly there 

Did you know that it was March 2020 when the BoE last lowered the base rate? In that instance, it fell to a lowly 0.1%. Since then, UK rates have gradually ticked up before the recent surge as the BoE raced to bring soaring inflation under control. 

A similar pattern has emerged around the world, and until recently the broad assessment was that the US Federal Reserve (Fed) would set the pace for rate cuts amongst other major central bank peers. However, as price pressures cool faster on the eastern side of the Atlantic, it increasingly looks like the European Central Bank may cut first, closely followed by the BoE, with the Fed easing monetary policy later in 2024. 

For the UK, it was noticeable how the latest messaging from the BoE walked a fine line between reiterating the need for monetary policy discipline (i.e. not cutting prematurely), and reassuring that cuts weren’t too far away (i.e. avoiding the risk that the economy would enter a doom loop in the absence of seeing better times ahead).

As the May MPC minutes stated: ““Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February. CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2½%, owing to the unwinding of energy-related base effects. There continue to be upside risks to the near-term inflation outlook from geopolitical factors, although developments in the Middle East have had a limited impact on oil prices so far¹.”  

Volatility may spike

Based on the latest MPC meeting, we anticipate 4 cuts in 2024, and it may be a number of months before UK inflation falls back to the 2% target. 

A more turbulent path may be trod in the US, as a result of the Fed’s delayed first cut. In the words of Fed chair Jerome Powell, “It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2 per cent inflation².” 

The gap between now and that first US cut, may lead to some investors making knee-jerk reactions to every piece of market data that comes out, in an attempt to second-guess the Fed. In such instances, it’s not inconceivable that we may see spikes in market volatility.  

Should that transpire, it’s important that investors don’t get distracted by short-term market moves, and instead remain focused on their long-term goals. 

Final thoughts

The global battle to tame inflation since 2022 has rarely been smooth, and the home stretch is proving to be longer than some might have anticipated. However, there is now light at the end of the tunnel and the path ahead to a lower rate environment is within touching distance.

For now, the message of getting invested, staying invested, and staying diversified, remains a useful one to keep in mind.

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