As financial markets digest the Bank of England’s (BoE) latest decision to cut interest rates one key question is what lies ahead in the coming months.
With inflationary pressures still present, economic growth teetering on the edge and global instability complicating the outlook, the Bank of England faces one of its most challenging policy environments in recent history.
And looking six months ahead, the economic landscape is likely to remain fraught with uncertainty.
If the Bank proceeds with gradual rate cuts we could see interest rates settling around 4% by mid-2024, with inflation moderating but not fully subdued.
But on the other hand, should economic conditions deteriorate – perhaps due to weakening global trade, domestic stagnation or ongoing external pressures – the Bank may be forced to act more aggressively, pushing rates towards 3.5% or even lower. Such a move would likely stimulate borrowing and investment but could also risk reigniting inflationary concerns.
Reading between the lines there’s likely two possible trajectories. The first, a measured and cautious approach, would see interest rate cuts implemented gradually – perhaps only one more reduction this year – bringing rates to around 4% over the next two years.
The second, a more aggressive strategy in response to economic stagnation and looming stagflation, could see rates slashed more significantly, potentially falling below 4% or even reaching 3.5% by the end of 2024.
Unfortunately most City analysts are still uncertain about which path policymakers intend to take. Traditionally, given their inflation-targeting mandate, the Bank would likely opt for the conservative course, limiting rate cuts to two.
Yet, the recent 8-2 Monetary Policy Committee (MPC) vote tells a different story. The decision was unexpectedly split, with two members – Swati Dhingra and, surprisingly, Catherine Mann, a known policy hawk - advocating for a full half-point cut. This suggests that even the more traditionally cautious policymakers recognise the necessity for deeper and faster rate reductions.
Economic indicators reinforce the argument for aggressive easing. GDP growth is stagnating, with some data suggesting contraction. When adjusted for temporary energy price spikes, inflation appears relatively subdued. In such conditions, central banks typically act swiftly to prevent further deterioration. Yet, several complicating factors muddy the waters.
First, the government’s fiscal expansion in the October budget injected additional spending into the economy, which could make the Bank hesitant to accelerate rate cuts.
Second, while the economy remains fragile, the Bank has revised its inflation forecast upwards, suggesting that price pressures remain persistent.
Third, external economic instability adds another layer of uncertainty. Germany has officially entered recession, and the U.S., under a resurgent Donald Trump, is threatening tariffs against its closest allies, potentially disrupting global trade flows. Taken together, these factors make the case for lower interest rates far less straightforward than historical precedent might suggest.
Ultimately, the Bank faces a delicate balancing act: cut too little and it risks entrenching economic stagnation; cut too aggressively and it risks fuelling inflationary pressures and financial instability.
The Bank’s next monetary decision is on March 20th so what next?
Tracker mortgage holders are the biggest winners from this month’s rate cut, as their payments are directly tied to the base rate.
A borrower with a £200,000, 25-year repayment mortgage could see monthly payments drop by around £29.
Lenders may also reduce Standard Variable Rates (SVRs), but these cuts aren’t guaranteed. SVRs tend to be significantly higher than fixed or tracker rates, meaning borrowers sticking with them could end up paying far more than necessary.
For those on fixed-rate mortgages, the impact won’t be immediate, but with an estimated 1.8 million fixed-rate deals expiring this year, continued rate cuts will be welcome news.
Some homeowners coming off ultra-low 5-year fixes may face sharp increases in repayments although this month’s reduction should soften the blow. Meanwhile, those who took out 2-year deals after the mini-budget turbulence will be eager to secure a better deal in the current, more favourable market.
Mortgage rates have had a volatile start to the year, and while the outlook appears more positive, as we’ve said before locking in a rate now can provide protection against unexpected increases.
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