Andrew Bailey, the Governor of the Bank of England, has signalled that interest rates will likely need to be cut in the coming quarters to maintain inflation at the 2% target. Despite policymakers voting to keep interest rates steady at 5.25%, Bailey emphasized the need for rate cuts, possibly exceeding current market expectations.

Money markets had anticipated two rate cuts by the year’s end before Bailey’s remarks. He stated that a rate reduction in June was not definitively ruled out nor guaranteed.

Bailey expressed optimism regarding falling inflation in the upcoming months, attributing it to encouraging economic indicators. He emphasized the necessity of observing sustained low inflation before implementing rate cuts.

LIS Show – MPU

Sir Dave Ramsden, the Bank’s deputy governor, supported calls for reducing borrowing costs, citing signs of inflation’s descent.

The Bank’s recent economic assessment revealed a 0.4% growth in the UK economy during the first quarter, marking a recovery from recession. It projected inflation to have eased back to the 2% target in April from 3.2% in March, with food prices stabilizing around this level for the remainder of the year.

Investors have adjusted their expectations, bringing forward predictions for rate cuts from August to June, with rates potentially dropping to 4.75% by year-end.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:


‘’This was the spring warm up act for the rate cut party set to kick off in the summer. Policymakers are showing signs of being more optimistic that unruly inflation looks more under control, and they appear a bit more prepared to bring an end to painfully high borrowing costs sooner rather than later.

There’s been a shift in opinion around the table, with another member of the MPC, Dave Ramsden, voting for a rate cut, joining Swati Dhingra who has been vocal about the need for lower borrowing costs for some time.

While the forecast for a lacklustre economy, and prospects of higher unemployment ahead, would ordinarily not give way to celebration, it’s being read as good news, because it means an interest rate cut in the summer is increasingly likely. The pound has fallen back against the dollar on the news, sparking a fresh run of enthusiasm among investors, helping the FTSE 100 climb sharply and extend its record run. The Bank of England is now expected to move much more quickly than the Fed in cutting rates, given the changing sentiment at the Bank.

However, there is still room for caution. Even though inflation is soon expected to reach the target of 2%, the Bank is expecting that it will creep back up again to around 2.5% later this year. Given that the Bank says it wants to ensure that inflation returns ‘sustainably’ to target, the implication here is that a June rate cut may still be too close for comfort for some policymakers. Upcoming economic data will be scrutinised closely in the weeks to come, and certainly a June rate cut can’t now be ruled out, but August remains more probable.”


The impact on annuities

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:

Today’s rate pause was widely expected, and we can expect this settled atmosphere to continue to play out in the annuity market. The latest data from the HL annuity search tool shows a 65-year-old with a £100,000 pension can get up to £7,030 per year from a single life level annuity with a five-year guarantee.

Stability is good news for would-be annuitants who may have sat on their hands while interest rates rose in the hope of securing a better income later on. Such a long period of stronger rates will have prompted many people to take the plunge in securing their guaranteed income. 

The interesting thing will be what happens in the coming months. The prospect of an interest rate cut is looming large, and we could see more people looking to take a leap and secure their rate now before interest rates start to weigh on annuity incomes. 

However, it’s really important to look before you leap, and shop around the market before opting for your annuity. The difference between providers can work out at hundreds of pounds a year – over the course of a retirement you could be thousands of pounds worse off. It’s worth taking the time to do your research and get the best deal for your circumstances.”

What will happen to savings?

Mark Hicks, head of Active Savings, Hargreaves Lansdown:

For savers, there are still multiple rates across easy access savings and ISAs, and fixed term products, which pay over 5%. However, banks have been slowly reducing the rates on offer in easy access space, as they start to prepare for a base rate cut later this year. There are only a handful of products now above 5%. The best rates in the savings market are still shorter-term fixed rates around the six month point, where savers can get comfortably above 5%. 

Given the commentary from the Bank of England, which suggests a base rate cut is coming in the next few months, I wouldn’t expect these deals to hang around for long, and savers should act fast before fixed terms are lowered or the variable rate products are taken off sale.”

What it means for mortgages

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“It’s as much of a surprise as a Bank Holiday washout followed by a mid-week heatwave, so the decision to hold rates steady for another month won’t move the market. It’s the commentary that the everyone will be pouring over.

There were indications that rate cuts may not be as distant as some mortgage holders were fearing. The Bank played down inflationary risks, and drew out the growing signs of weaknesses in the economy – both of which point to the likelihood of a cut this summer. It remains to be seen whether this brings market expectations forward. If so, it could mean better news in the mortgage market.

This will be music to the ears of remortgagers, who have endured some horrible hikes in recent weeks. Moneyfacts figures show the average 2-year fixed rate mortgage rose from 5.56% at the end of January to 5.93% today. We can’t expect seismic shifts, but there’s likely to be some movement in the direction of 5%, as the market adjusts. It’s also a relief for anyone who shifted to a variable rate deal, many who would have been expecting a spring cut at the point when they made the decision. This is likely to come as particularly good news to the one in four people which the HL Savings & Resilience Barometer shows could be at risk of mortgage arrears by the end of 2024.”

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