Perhaps with under a month to go until the next Bank of England Monetary Policy Committee (MPC) rate-setting meeting – on 20 March – it is understandable we are seeing every single piece of data that could impact its decision on bank base rate (BBR) under the microscope.
Most recently, and perhaps most pertinently, were the latest inflation figures, which showed a monthly rise – up from 2.5% in December to 3% in January. Although I’m not sure the apparent wailing and gnashing of teeth this appears to have engendered is really necessary.
Especially given that the Bank of England itself, and the governor, Andrew Bailey, recently highlighted how they expected inflation to increase in these months, but that its self-styled ‘short-run hump’ would not last, and it was unlikely to impact on any future decisions to cut rates.
However, some in the trade press media, amid what I would call ill-judged comments from some, already appear to be nailing their colours to a mast, which says these latest inflation figures will put a halt to any potential future and further cuts to BBR.
Inflation is not always as influential as it may seem
For those that have missed Bailey’s recent comments, when asked about any existing spike in inflation sticking around for the foreseeable future, he said: “The context is not really supporting the view that we will get more persistence [of inflation]… We will see the gradual disinflation going on.”
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This sounds a lot like economist speak, which in itself can also appear like the covering of backs. However, what I’m hearing is that, despite the anticipation that inflation may reach levels around 3.7%, they are predicting it to fall after this. Therefore, it should not be marked red that this stops their intention to keep cutting rates.
Of course, there are some major global factors that are likely to play their part here in terms of UK inflation, not least any US trade tariffs coming from President Trump. However, again, we still appear to be in the same place for potential rate cuts as we were before the inflation figures were revealed.
Further base rate cuts could be coming
It’s perhaps in this context that we can place the pricing by a couple of lenders pushing rates below 4% recently. To my mind, it would now be surprising if the MPC didn’t act to cut BBR further, with the markets pricing in a further reduction in May.
Lest we forget two members of the MPC last time around voted for a 50 basis point (bps) cut rather than the 25bps the overall committee eventually agreed upon.
So, while these latest inflation figures, on the surface, appear to mess with a narrative that reads like we’re likely to get multiple cuts to BBR during 2025, I’m inclined to believe what is coming out of the Bank of England itself – that this is a temporary increase in inflation, and it’s likely to increase further. However, when it comes to cutting rates, the mood music still plays in a downward direction through 2025 and possibly beyond.
Reasons to be optimistic
It won’t get us to the rate levels we enjoyed pre-mini Budget, and we should certainly prepare existing borrowers for a different environment to the ones they were fortunate to experience back then.
However, it is moving us in the right direction, easing the payment shock that could be felt by those coming off ultra-low rates and easing the monthly mortgage amounts of those unfortunate to have required mortgage (re)financing in the wake of Truss and Kwarteng.
Let’s not read too much into this; let’s look forward with further confidence to a continuation of downward product rates, and make the most of the business opportunities that such price movements always deliver.
