The Bank of England has held rates at 4.75%, citing concerns over persistent inflation and the government’s Budget on Oct. 30.
At a meeting of the Bank’s Monetary Policy Committee yesterday, committee members voted six to three in favor of a rate hold.
“The committee discussed the extent to which recent developments in output could reflect the weakness of both demand and supply, such that there might be fewer implications for the margin of spare capacity in the economy and thus domestic inflationary pressures,” the Bank said in a statement accompanying the decision.
“There was also uncertainty around how the measures that had been announced in the Autumn Budget were affecting growth.
“This included the extent to which companies would, over time, take account of the indirect spillovers to private demand from higher public spending, as well as the direct consequences of the increase in employer National Insurance contributions that would take effect from April.”
Bank of England Governor Andrew Bailey has previously said the increased contributions were the “biggest issue” he is monitoring in the UK economy.
The decision follows fresh data released by the UK’s Office for National Statistics on Wednesday, which showed a second increase to the Consumer Price Index in as many months—to 2.6%—though this was 0.1% lower than markets had expected.
It also follows a rate cut by the US Federal Reserve yesterday, where US stocks immediately fell on the suggestion of fewer or no rate cuts by the Fed in 2025.
“Rate cut expectations have fallen rapidly over the course of 2024, as central bankers proved more cagey than investors had hoped, and inflation proved a tad stickier,” says Michael Field, European Equity Strategist at Morningstar.
“Central banks do not, however, work along calendar years, so are in no rush to get in another cut before we close out 2024. Granted, the Bank of England is now something of an anomaly among western central banks, with rates still high at 4.75%. It’s only cut rates on two occasions this year. The market is, however, pricing in another 80-plus basis point cuts in 2025.”
AJ Bell Investment Director Russ Mould says that, despite the Fed cutting rates and the Bank of England holding, the two central banks are now in some way aligned.
“If the Fed is now playing the ‘rates higher for longer’ game, it suggests to investors in the UK that the Bank of England will do the same,” he says.
“That’s why housebuilders were among the biggest fallers on the FTSE 100 [this morning], alongside economically sensitive stocks such as packaging groups Mondi MNDI and DS Smith SMDS, together with banks Barclays BARC and NatWest.”
Today, the FTSE 100 and FTSE 250 indexes are down more than 1%, with Wizz Air Holdings WIZZ and Ceres Power Holdings CWR leading the latter index lower.
Why Has The Bank of England Held Rates?
Monetary theory posits that inflation can be tamed by central banks limiting the supply of money in the real economy.
Higher interest rates make debt, including mortgages, more expensive, meaning people use more of their money to pay of their debts. In theory, this cools demand for goods, and with it, price rises.
Amid higher interest rates, the UK has played host to falling inflation throughout 2024, though the trend is now upwards once more. UK inflation has fallen steadily from its 2022 peak of more than 11%, but transport costs are now driving CPI up, with fuel and second-hand cars the main contributors.
“On a monthly basis, prices fell by 0.8% in November 2024 compared with a fall of 1.7% a year ago. The change in the annual rate was mainly the result of upward effects from motor fuels and second-hand cars, partially offset by a downward effect from air fares,” the ONS said in a statement yesterday.
Will The Bank of England Cut Rates in 2025?
Markets are still assuming there will be rate cuts in the UK next year.
Ranjiv Mann, senior fixed income portfolio manager at AllianzGI, says a return to rate cuts next year certainly cannot be ruled out.
“A broad range of UK labor market indicators suggest a weakening outlook, with surveys indicating that UK firms (especially smaller firms) are scaling back hiring plans following the announced hikes in the rate of employer national insurance contributions in 2025,” he says.
“Although wage growth and services inflation have been slightly firmer than expected recently, the disinflationary trend in the UK economy remains intact, with core CPI inflation (at 3.3% year-on-year) well below the peaks of last year.
“In the short term, BoE policymakers have indicated that it may be too early to declare victory on the inflation fight given the stickiness of services inflation. The market continues to price a relatively shallow UK interest rate cutting cycle into 2025, but we believe that policy expectations could be re-priced materially lower if US trade policy results in a sharp re-pricing lower in the European growth outlook.”
What Should Investors do?
According to Mann, BoE policy pricing and gilt valuations present an attractive case for gilts. However, according to Morningstar Investment Management’s 2025 Outlook report, uncertainty around rates warrants investors looking beyond fixed income to diversify their portfolios.
“We believe looking to assets outside of fixed income as diversifiers may be wise given the uncertainty regarding inflation and interest rates, which has been amplified following the 2024 US election results, it says.
“In this scenario, we look to historical periods for guidance, such as those before the 2000s when we experienced ultralow inflation and interest rates. In this environment, bonds did not always act as the equity hedge that many investors hoped for. Instead, many liquid alternative strategies were better equity diversifiers than fixed income.”
And as for equities, Morningstar’s Field is still optimistic for the year ahead.
“With plentiful equity market opportunities for investors in the UK, we believe further interest rate cuts over the course of 2025 will lighten the load for consumers and businesses alike,” he says.
“This will create a more supportive economic backdrop for commerce generally, something to cheer over the Christmas period.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
