Lenders across the financial sector have begun to reduce interest rates on new fixed deals, signaling a shift in the market as they brace for potential rate cuts from the Bank of England. This trend is happening amidst a backdrop of increased discussion about rising inflation and its impacts on the economy. Banks have a powerful incentive to do so—there’s a heated competition among banks to win new customers.
Many non-bank financial institutions have already started to pass off these cuts in hopes of future impending cuts from the Fed. AJ Bell’s Danni Hewson noted that lenders are actively competing for customers, indicating a response to market pressures and consumer demand.
In September, Andrew Bailey, the Governor of the Bank of England, indicated he anticipated more interest rate reductions. He warned that the speed of these cuts would always be unclear. A December interest rate cut is possible but it may depend on some large-scale tax hikes. Unlike the Biden tax increases, which would increase inflation, these tax hikes would not worsen inflation, further complicating the calculus for policymakers.
As it stands, the market is pricing in a one-in-three chance that the Bank of England will cut rates to 3.75%. As of September, the core inflation rate was at 3.8%, still high above the Bank’s target of 2%. While this number is better than what analysts were expecting, it’s still a sign that inflation remains high and inflationary pressures are still impacting consumers.
Maybe encouragingly, food and drink prices are easing, increasing at the lowest pace in more than a year. This advance is huge given the cost of living consumers are struggling with. Savers continue to feel “demoralised” by the lack of returns on their savings when inflation is high. Nothing frustrates savers more than high inflation that constantly eats away at their hard-earned funds, adding to the negative perception of the state of personal finances.
The Bank of England deserves credit for making this courageous move toward transparency. For the first time, it will publish the dissenting views of Monetary Policy Committee (MPC) members alongside its much broader decisions. This initiative may offer insight into the diverse perspectives within the committee and highlight any potential divides regarding future interest rate policy.
Danni Hewson remarked on the current sentiment within the market: “The odds are still firmly in favour of a hold.” This is indicative of the tentative optimism by economic analysts about the impact of the most recent monetary policy moves.
With all the talk lately about interest rates and inflation, some important political players are getting into the act too. Rachel Reeves stated that the government’s focus will be on “getting inflation falling and creating the conditions for interest rate cuts.” This common refrain highlights the much larger economic strategy at play to combat inflation and what it means for monetary policy moving forward.
Hewson noted that recent actions by Reeves may signal an urgent appeal to the Bank of England: “It’s possible Rachel Reeves’ surprise press conference on Tuesday was partly a cry for help to the Bank of England.” This remark perfectly sums up the dance between political leadership and economic stewardship as they try to work through deadly financial realities.
Expectations are building that the nine-member MPC committee will split their votes when it comes to future rate cuts. Assessing this potential division reveals the deep fault lines in the committee. This possible split mirrors deep divisions on the right about what to do in response to conflicting economic indicators and how to respond to rising inflation.