- Market still expects two rate cuts by the end of this year, but don’t count your chickens
- This will be seen as a dovish hold with all eyes turning to the rate decision in August
- Muted impact expected on mortgage rates
- Savings rates continue to dwindle
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“Against a backdrop of armed conflict, tariffs, and inflationary pressures, it’s little wonder the Bank of England is holding fire on interest rate cuts. The spike in the oil price stemming from the conflict in the Middle East increases inflationary risks, if it’s sustained. Meanwhile the 9 July tariff deadline is also coming up fast, which might well herald a fresh set of economic circumstances. The market is still expecting two rate cuts by the end of this year, but given the swirling vortex of uncertainty currently engulfing world affairs, it’s best not to count your chickens until they’re hatched.
“Although the Bank has decided to take no action right now, this will be seen as a dovish hold by the market because three members of the rate committee voted to cut base rate to 4%. The doves on the committee point to a loosening labour market in the UK and risks to global growth as reasons why a rate cut might be in order. The remainder of the committee remains more circumspect, but it will now only take two of them to peel off in favour of a rate cut to push one through. All eyes will now turn to the next meeting in August as a possible stage for a cut to base rate.
“Mortgage rates have continued to decline of late, but that’s almost certainly a result of previous interest rate falls feeding through and competitive pressure in the mortgage market. The latest decision from the Bank of England doesn’t hugely alter the interest rate outlook, and so the effect on mortgage rates is likely to be muted. At the margins we may see some more rate cuts trickling through. Of greater import are the current conflict in the Middle East and further developments in US trade policy around the 9 July tariff deadline, which could well shift economic forecasts and have a significant impact on the UK mortgage market, for better or worse.
“Meanwhile cash rates have been declining, with the average easy access account now paying 2.7%, according to Moneyfacts. That’s below the current rate of inflation, and while this is a backward-looking metric, the Bank now expects CPI to remain at present levels for the rest of this year. After a sugar rush of high cash rates, savers might now be looking at their returns with some measure of disappointment. It remains to be seen whether lower rates will tempt savers to move out of cash and into riskier assets in search of better long-term returns. For many people cash is the only port of call they consider as a home for their savings, and they accept taking a ‘like it or lump it’ attitude to the returns they receive.”
