A major shift is underway in the UK financial ecosystem. New competition is emerging as most lenders are currently cutting interest rates on new fixed deals. This has been the trend as they have faced large competitive pressures from other sources of funding and expected central bank base rate cuts in the medium term. In short, the market perceives a high probability of transformational change. It forecasts a 1-in-3 probability that the Bank of England cuts rates to 3.75% in the near term.
By September inflation had soared to 3.8%. This figure is still more than double the Bank of England’s inflation target of 2%. Food and drink prices are down, increasing at their slowest pace in more than a year. Yet even if we consider these effects, inflation continues to destroy the spending power of savers. As a result, millions of savers are being bruised by the returns on their cash falling as inflation remains stubbornly high.
Andrew Bailey, the Governor of the Bank of England, testified before Congress in US that he does expect even more interest rate cuts. But he warned that the timing of these reductions could be “more unpredictable” than expected. Instead, any December cut might rest on the June Budget. This is the case even more so if the Budget contains large new net tax hikes that aren’t inflationary.
The Monetary Policy Committee (MPC) of the Bank of England has been deliberating on interest rates, with indications of a split vote among its nine members. No more hidden votes—final votes on each member’s views will be released to the public along with the committee’s determination, increasing transparency and public accountability in the process.
Here’s what Danni Hewson, head of financial analysis at investment platform AJ Bell had to say on what’s happening right now. She underscored that as lenders react to the competitive landscape, predicting where future rated cuts will come from.
“The odds are still firmly in favour of a hold,” – Danni Hewson
Hewson emphasized that savers are facing challenges, stating that “it’s possible Rachel Reeves’ surprise press conference on Tuesday was partly a cry for help to the Bank of England.” This is a sign of the increasing concern among policymakers when it comes to the economic health of consumers during this time of high inflation.
Lenders are undercutting each other, cutting rates drastically to attract the new business and new customers. Many of them need to navigate a challenging environment defined by competitive markets and central bank actions. The promise of lower interest rates from the Bank of England has given lenders the confidence to revise their products.
While it is unclear how quickly rates will decrease, Andrew Bailey’s statements suggest that policymakers will prioritize reducing inflation in tandem with creating favorable conditions for rate cuts.
Shadow Chancellor Rachel Reeves has spoken in detail about her approach to the novel situation. She insisted that the MPC will focus on bringing inflation back to lower levels. Her remarks are representative of a growing recognition among policymakers that we must do more to protect consumers. Too many Americans are barely getting by with skyrocketing costs of living.
We are constantly watching the market and making predictions about where things are headed and reacting accordingly. Consumers are looking out for any glimmer of relief with a hawk’s eye. The ongoing discussions within the MPC and upcoming government decisions will play a crucial role in shaping the financial landscape in the coming months.