Tag: BoE

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Why are central banks selling gold now after a massive buying spree

Central banks offload gold

Central banks are selling gold now for one blunt reason: they need cash, and gold is the most liquid, pain‑free asset they can dump without triggering a credibility crisis.

The news wires report— “liquidity pressures”, “emerging‑market currency volatility”, “increased spending requirements” — but the underlying mechanics are more structural and revealing – they need the cash!

Central banks have swung from record gold accumulation to noticeable selling because the global system has shifted from long‑term hedging to short‑term survival.

The war in the Gulf has tightened liquidity, pushed up government spending, and destabilised emerging‑market currencies, forcing policymakers to turn their most liquid reserve into cash.

Gold is the one asset they can sell quickly without signalling panic, and that is shaping behaviour across dozens of reserve banks.

War, liquidity and the need for dollars

The Hormuz conflict has driven up energy costs, disrupted shipping and forced governments to spend more on defence and subsidies.

Emerging‑market central banks, already under pressure from currency volatility, need hard currency to intervene in FX markets and stabilise their economies. Selling gold provides instant access to dollars without dumping sovereign bonds or burning through already‑thin reserves.

A falling gold price creates a window

Gold has slipped around 12% from its January 2026 peak, entering a contraction phase despite geopolitical risk. For reserve managers, that is a cue to realise gains from the 2022–25 buying spree while prices remain historically high.

Selling now avoids being forced to sell later at distressed levels if the conflict deepens or fiscal pressures worsen. It will be bought back again at a later time.

The buffer they built is now being used

The record buying of recent years was driven by fears of sanctions, inflation and geopolitical fragmentation.

Those purchases created a cushion that can now be drawn down. The shift to selling does not signal a loss of faith in gold; it reflects the reality that reserves accumulated for stability are now being used to fund stability.

The deeper story is not about gold at all, but about a global system under strain: governments facing rising costs, currencies under pressure, and central banks forced to prioritise liquidity over long‑term positioning.

This is why central banks hold gold.

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UK economy will be hit hardest by the U.S.-Israel Iran war warns the IMF

UK Economy damaged by U.S. Iran War

The IMF’s warning that the UK would suffer the sharpest growth hit among rich economies from an Iran‑related war is rooted in a simple structural reality.

Britain is unusually exposed to energy‑price shocks, yet unusually weak in the buffers that normally absorb them according to the IMF.

Why the UK will be hit harder than its peers

The UK enters this crisis with three vulnerabilities

  • High dependence on imported energy. North Sea output has declined for years, leaving Britain reliant on global LNG markets. When Middle Eastern supply is disrupted, LNG prices spike first and hardest. The U.S. and eurozone have deeper domestic energy bases or cheaper pipeline access.
  • A structurally fragile inflation profile. The UK’s inflation has been stickier than that of other G7 economies, driven by food, energy and services. A renewed oil shock feeds directly into household bills and transport costs, forcing the Bank of England to keep rates higher for longer.
  • Weak productivity and stagnant investment. Britain has less momentum to absorb an external shock. When energy prices rise, UK firms cut back faster, and consumers retrench more sharply.
  • UK Government policy. Ed Miliband and his ‘likely’ misguided staunch defence of Net Zero policies and expensive energy costs have left the UK seriously exposed to shocks – such as this.

The IMF’s logic

The Fund argues that a prolonged disruption in the Strait of Hormuz would push global oil prices sharply higher.

For the UK, this translates into

  • Higher wholesale gas costs, because LNG markets reprice off oil‑linked benchmarks.
  • A renewed inflation surge, delaying rate cuts and tightening financial conditions.
  • A squeeze on real incomes, hitting consumption—the UK’s main growth engine.
  • A fall in business investment, already one of the weakest in the OECD.

The IMF’s modelling suggests that the UK’s growth rate could fall more steeply than that of the U.S., Germany or France because those economies either have stronger industrial bases, more resilient energy systems or more fiscal space to cushion the blow.

The broader picture

This is less about geopolitics and more about structural brittleness. A global energy shock exposes the UK’s unresolved weaknesses: high import dependence, fragile inflation dynamics and a decade of under‑investment.

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Bank of England Holds Rates at 3.75% as Gulf Tensions Cloud the Outlook

BoE Interest Rate

The Bank of England has held interest rates at 3.75%, opting for caution as the economic shock from the escalating conflict involving Iran ripples through global energy markets.

The Monetary Policy Committee delivered a unanimous vote to pause, a notable shift from earlier in the year when a spring rate cut had seemed almost inevitable.

The Bank now expects inflation to rise again in the coming months, potentially reaching 3.5% as higher oil and gas prices feed through to fuel, household energy bills, and business costs.

Governor Andrew Bailey reportedly stressed that monetary policy cannot counteract a supply‑side shock of this nature, warning that the path of inflation will depend heavily on how quickly safe shipping routes through the Strait of Hormuz can be restored.

For households, the hold means no immediate relief on borrowing costs. Fixed‑rate mortgage deals have already been drifting higher as lenders price in the possibility of prolonged instability.

Some brokers report a surge in “panic buying” of mortgages as borrowers rush to lock in rates before they climb further. Savers, meanwhile, may see modestly improved offers, though competition remains muted.

Up or down?

The key question now is whether the next move is up or down. Before the conflict, markets had pencilled in two rate cuts for 2026.

That expectation has evaporated. Traders now see a non‑trivial chance of a rise to 4% later in the year, though economists caution that weak growth and a softening labour market could still restrain the Bank from tightening unless inflation accelerates sharply.

Over the next six weeks, policymakers will be watching energy prices, shipping conditions, and wage data closely.

For now, the Bank has chosen to wait, watch, and hope the shock proves temporary — but the margin for error is narrowing.

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UK Mortgage Market Faces Turmoil as Iran Conflict Drives Interest Rates Up

The UK mortgage market has been thrown back into a state of turbulence not seen since the aftermath of the 2022 mini‑Budget, as lenders scramble to reprice deals in response to global instability triggered by the U.S. Israel war with Iran.

Average rates on two‑year fixed mortgages have now climbed above 5%, reaching their highest level since last August, according to data from Moneyfacts. Five‑year fixes have also risen, marking their most expensive point since mid‑2024.

Little or no warning

The sudden shift has caught borrowers off guard. Nearly 500 mortgage products have been withdrawn in just 48 hours, the steepest contraction in available deals since the Truss–Kwarteng fiscal shock.

Lenders are reacting to sharp movements in gilt yields, which have become increasingly volatile as markets reassess the likelihood of Bank of England rate cuts this year.

Before the conflict erupted, investors had broadly expected the Bank to begin easing borrowing costs. That optimism evaporated as oil prices surged, raising the prospect of renewed inflationary pressure.

With Brent crude still more than 20% higher than before the war and reaching over 40% increase at one stage, expectations of cheaper mortgages have been replaced by fears of a prolonged period of elevated rates.

Timing

For homeowners approaching the end of a fixed deal, the timing is particularly painful. The average two‑year fix has jumped from 4.84% to 5.01% in less than four days, while five‑year rates have risen from 4.96% to 5.09%.

First‑time buyers, already squeezed by high prices and stagnant supply, face a shrinking pool of products and rising monthly costs.

The wider cost‑of‑living picture is also darkening. Petrol and diesel prices continue to climb as Middle East supply disruptions ripple through global energy markets.

With inflation risks resurfacing, the path for mortgage rates now hinges on how the conflict evolves — and whether markets can regain their footing.

Fuel up, energy costs up and mortgage rates up – all in just a weekend – that didn’t take long.

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UK inflation’s latest fall sharpens focus on Bank of England rate cuts

UK inflation at 3%

The UK’s inflation rate has dropped to 3%, its lowest level since March last year, renewing expectations that the Bank of England (BoE) may soon begin cutting interest rates.

The fall, recorded in January, marks a clear reversal from December’s unexpected uptick to 3.4% and reinforces the broader downward trend seen in late 2025.

Economists note that easing petrol, food, and airfare prices have been key contributors to the decline, helping inflation move closer to the government’s 2% target.

Bank of England easier decision

The BoE has held Bank Rate at 3.75% in recent meetings, emphasising the need for confidence that inflation will not only reach 2% but remain there sustainably.

However, with inflation now falling faster than previously forecast, policymakers appear to have greater room to consider loosening monetary policy later this spring.

The Bank itself has acknowledged that inflation is likely to return to target ‘a bit quicker than previously forecast’, suggesting scope for cuts if economic conditions evolve as expected.

Rate reduction likely in March or April 2026

Market analysts increasingly anticipate a rate reduction as early as March or April, particularly as wage growth cools and unemployment edges higher—factors that reduce domestic inflationary pressure.

For households and businesses, a cut would offer welcome relief after two years of elevated borrowing costs, potentially lowering mortgage rates and improving credit conditions.

While the BoE remains cautious, the latest inflation figures strengthen the case for a shift towards easing—signalling that the long, difficult climb down from the inflation peak may finally be nearing its conclusion.

As expected

Most economists and market analysts expected UK inflation to fall back to around 3% in the January release, down from 3.4% in December 2025.

UK inflation falls to 3%
UK inflation falls to 3%

This means the actual figure—3%—came in exactly in line with forecasts, rather than surprising to the downside or upside.

That alignment matters for the Bank of England because it reinforces the sense that inflation is easing broadly as expected, rather than stalling or re‑accelerating.

Employment data

Alongside falling inflation, the Bank of England is closely watching UK labour market data, which remains a key factor in its interest rate decisions.

Recent figures show wage growth is easing, with average earnings excluding bonuses rising at a slower pace—now below 6%—while job vacancies continue to decline.

This softening suggests that domestic inflationary pressure from pay settlements may be waning, giving the Bank more confidence that inflation can return to target sustainably.

However, unemployment remains low, and services inflation is still sticky, meaning policymakers are likely to weigh jobs data carefully before committing to rate cuts.

If wage growth continues to moderate and employment weakens further, the case for easing monetary policy will strengthen.

Office for National Statistics

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Bank of England holds rates amid inflation concerns

BoE interest rate decision

On 18th September, the Bank of England voted 7–2 to keep interest rates steady at 4%, resisting calls for further easing amid persistent inflationary pressures.

The decision follows August’s 25 basis point cut and reflects caution over elevated wage growth and stagnant UK GDP.

Inflation held at 3.8% in August, nearly double the Bank’s 2% target. Policymakers signalled a ‘gradual and careful’ approach to future cuts, citing upside risks to medium-term inflation.

With economic growth flat and the jobs market cooling, analysts now expect the next rate cut to come in early 2026.

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Bank of England cuts interest rates to 4% amid economic uncertainty and high inflation

Inflation in the UK

On 7th August 2025, the Bank of England’s Monetary Policy Committee voted narrowly—5 to 4—in favour of reducing the base interest rate by 0.25% to 4%, marking its lowest level since March 2023.

This is the fifth rate cut in a year, aimed at stimulating growth amid sluggish GDP and persistent inflation, which currently stands at 3.6%.

Governor Andrew Bailey reportedly described the decision as part of a ‘gradual and careful’ easing strategy, balancing inflation risks with signs of a softening labour market.

While some committee members reportedly advocated for a larger cut, others urged caution, reflecting deep divisions over the UK’s economic trajectory.

The move is expected to ease borrowing costs for homeowners and businesses, with tracker mortgage rates falling immediately. However, savers will be losing out as rates continue to drop.

However, analysts warn that future cuts may hinge on upcoming fiscal decisions and inflation data, leaving the path forward uncertain.

Inflation is yet to be fully tamed.

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UK jobs market slows as unemployment rises

UK labour market

The UK jobs market continued to lose momentum, with fresh data from the Office for National Statistics highlighting a notable slowdown.

Unemployment has climbed to 4.7%, reaching its highest level in four years, while job vacancies fell for a third consecutive year to 727,000—the lowest in a decade, excluding the pandemic dip.

Pay growth also eased, with average annual wage increases slowing to 5% in the March–May 2025 period.

Economists suggest the Bank of England may consider an interest rate cut next month to support employment, although rising inflation remains a complicating factor.

Firms appear hesitant to hire or replace staff, signalling broader economic uncertainty. While the ONS has urged caution around the collection of unemployment data, the trend points to mounting pressure in the UK’s jobs landscape.

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UK inflation unexpectedly climbs to 3.6% in June 2025

UK inflation up!

The latest UK inflation figure of 3.6% is a setback for those hoping for a steady decline, especially after May’s 3.4%.

With core inflation and food prices also climbing, it’s a sign that underlying price pressures remain stubborn.

It further complicates the Bank of England’s path towards interest rate cuts and dents optimism for faster economic relief.

Summary

📈 Headline CPI: Increased to 3.6%, up from 3.4% in May 2024

🔍 Core inflation (excluding food, energy, alcohol, and tobacco): Rose to 3.7%, from 3.5%

🛒 Food inflation: Climbed to 4.5%, its highest level in over a year

⛽ Motor fuel prices: Were the largest contributor to the monthly rise

📊 Monthly CPI change: Up 0.3%, compared to 0.2% the previous month

This hotter-than-expected reading has sparked debate over the Bank of England’s next move.

While a rate cut in August 2025 is still widely anticipated, the inflation uptick may prompt a more cautious approach thereafter.

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Bank of England holds UK interest rate at 4.25%

UK interest Rate

The Bank of England held its base interest rate steady at 4.25% on Thursday 19th June 2025, with a 6–3 vote from the Monetary Policy Committee (MPC).

Three members pushed for a 0.25% cut, but the majority opted for caution amid persistent inflation and global uncertainty.

Inflation ticked up slightly to 3.4% in May, driven by regulated prices and earlier energy cost increases.

While wage growth is easing and the labour market is loosening, the Bank signalled it’s not ready to ease policy further just yet

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Bank of England cuts interest rates by 0.25% to 4.25%

BoE

The Bank of England has cut interest rates by 25 basis points to 4.25% on 8th May 2025 marking its fourth reduction since August 2023.

The decision, backed by a majority of the Monetary Policy Committee, reflects easing inflation pressures and a need to support economic growth.

Inflation, currently at 2.6%, is expected to rise temporarily to 3.5% due to household bill increases.

The cut will provide relief to homeowners and businesses facing high borrowing costs.

However, policymakers remain cautious, balancing growth stimulation with inflation control. Markets anticipate further cuts, potentially bringing rates down to 3.25% by year-end.

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Bank of England holds interest rate at 4.5%

UK interest rate

The Bank of England (BoE) has decided to maintain its base interest rate at 4.5%, following its latest Monetary Policy Committee (MPC) meeting

The Bank of England has warned economic and global trade uncertainty has ‘intensified’ as it held UK interest rates at 4.5%.

This decision, supported by eight out of nine committee members, reflects the Bank’s cautious approach amidst ongoing economic challenges.

The move comes as inflation remains above the Bank’s 2% target, with the UK Consumer Prices Index (CPI) inflation recorded at 3% in January 2025. Rising energy costs, water bills, and transportation fares have contributed to the persistent inflationary pressures.

Despite these challenges, the UK economy has shown mixed signals, with a slight GDP growth of 0.1% in the final quarter of 2024, followed by a contraction of 0.1% in January 2025.

The BoE’s decision to hold rates steady aims to balance the need to control inflation while supporting economic stability. Governor Andrew Bailey reportedly emphasised the importance of monitoring both global and domestic economic developments closely (that’s useful then – what a good idea).

The MPC’s cautious stance reflects concerns over global trade uncertainties and the potential impact of geopolitical tensions.

While the decision provides some relief to borrowers, it leaves savers and businesses navigating a landscape of economic uncertainty.

Analysts predict that the Bank of England may consider rate cuts later in the year, depending on inflation trends and economic performance.

For now, however, the focus remains on maintaining stability in a forever fast challenging environment.

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Bank of England cuts interest rate to 4.50% and cuts growth forecast for 2025

BoE

The Bank of England has halved its growth forecast for 2025 as it cut interest rates to 4.50% – the lowest for around 18 months

The economy is now expected to grow by 0.75% in 2025, the Bank of England reportedly said, down from its previous estimate of 1.5%.

Not good news for the chancellor, Rachel Reeves.

Bank of England cuts interest rates to 4.5% amid economic slowdown

The Bank of England announced a reduction in its benchmark interest rate from 4.75% to 4.5%, marking the third cut since August 2024.

This decision comes as a response to the ongoing economic challenges facing the UK, including sluggish growth and concerns about the potential effect of Trump’s tariffs.

The primary reason behind this rate cut is the Bank’s effort to stimulate economic activity by making borrowing cheaper.

With the cost of borrowing now at its lowest level since June 2023, homeowners with variable rate or tracker mortgages will see immediate relief, with monthly repayments expected to decrease by approximately £29 per month on an average mortgage.

Small businesses, which have been struggling under heavy borrowing burdens, are also expected to benefit from this move.

Growth concerns linger

The Bank’s decision follows a series of disappointing economic indicators. The latest GDP figures showed that the economy only grew by 0.1% in November 2024, falling short of economists’ forecasts.

This sluggish growth, coupled with two months of falling output, has led the Bank to revise its growth forecast for 2025 downward.

The Bank now anticipates no growth during the fourth quarter of the year, and some economists are predicting as many as six rate cuts this year, potentially bringing the rate down to 3.25%.

While the rate cut is expected to provide some relief to borrowers, it also raises concerns about the long-term impact on savings and investment. With interest rates at historic lows, savers may find it challenging to earn meaningful returns on their deposits.

Additionally, the low-interest rate environment could encourage excessive borrowing and lead to asset bubbles, posing risks to financial stability. Has inflation finished?

The Bank of England’s decision to cut interest rates to 4.50% is a strategic move aimed at boosting economic activity and providing relief to businesses and homeowners.

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UK economy had zero growth between July and September 2024 – bad to worse

UK economic data

Revised official figures indicate that the UK economy was weaker than initially estimated between July and September 2024. The economy experienced zero growth in these three months, down from an earlier estimate of 0.1%.

UK Chancellor, Rachel Reeves reportedly stated that the challenge to fix the economy “after 15 years of neglect is huge,” and October’s Budget would “deliver sustainable long-term growth, putting more money in people’s pockets.”

However, one of the UK’s leading business groups, the CBI, said its latest company survey suggested “the economy is headed for the worst of all worlds.”

The downward revisions will be a setback for Labour, which has prioritised boosting economic growth. It has promised to deliver the highest sustained economic growth in the G7 group of wealthy nations.

Separate figures released last week showed that inflation, the rate at which prices increase over time, is rising again at its fastest pace since March 2024. But it is close to the Bank of England target of 2%

The Bank of England voted to hold interest rates at the last meeting, stating that it believed the UK economy had performed worse than expected, with no growth between October and December 2024.

Businesses have warned that measures announced in October’s Budget, including a rise in employer national insurance and a higher minimum wage, could force them to raise prices and reduce the number new jobs.

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UK inflation unexpectedly rises to 2.3% in October 2024

UK shoppers

The inflation rate, which measures price changes, hit 2.3% in the year to October 2024, a bigger-than-expected increase from 1.7% in September 2024.

The increase was in part due to an increase in the regulator-set energy price cap that took effect in October 2024, which is expected to increase energy price inflation through the winter.

The Office for National Statistics (ONS), said while higher energy costs had contributed, this increase was offset by falls in live music and theatre ticket prices.

October 2024 UK inflation

October 2024 UK inflation
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Bank of England lowers UK interest rate by 0.25% to 4.75%

Interest rate down

The Bank of England cut interest rates by 0.25% Thursday 7th November 2024, even as Labour’s budget announcement confuses the outlook for future policy easing.

The anticipated reduction, marking the central bank’s second this year, lowers the key rate to 4.75%.

Financial markets had forecast a high probability of the quarter-point decrease at the November 2024 meeting, although analysts cautioned that future cuts might be postponed due to the Labour government’s tax-and-spend budget.

Investors are now awaiting remarks from Governor Andrew Bailey and his team regarding their updated economic forecast following the budget and the U.S. presidential election.

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UK inflation in surprise fall to 1.7%

UK Inflation down below target

UK inflation fell unexpectedly to 1.7% in the year to September 2024, the lowest rate in three-and-a-half years

This indicates that inflation, which is the rate at which prices increase over time, is currently below the Bank of England’s target of 2%, potentially leading to further reductions in interest rates next month.

The Office for National Statistics (ONS) reported that petrol and diesel prices saw a notable decrease, falling by 10.4% in September 2024compared to the same month the previous year.

Additionally, the cost of fares for domestic, European, and long-haul flights contributed to the lower inflation rate. While fares typically decrease after the summer peak, this year they have reduced more than usual.

UK interest rate at 1.7% below the Bank of England target of 2%

UK interest rate at 1.7% below the Bank of England target of 2%

With inflation dropping below economists’ expectations, the markets are anticipating a cut in interest rates at the Bank of England’s upcoming meeting in November 2024. The present rate stands at 5%, and a reduction of 0.25% is now deemed highly probable.

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UK inflation rate climbs to 2.2%

UK inflation

The UK’s inflation rate has risen for the first time this year, official ONS figures show.

This indicates that overall prices increased by 2.2% in the year leading up to July, a rise from 2% in June, surpassing the Bank of England’s target.

The anticipated increase is primarily attributed to the less significant drop in gas and electricity prices compared to the previous year.

The Bank of England reportedly anticipates a further increase in inflation this year before it declines again.

The core inflation rate, which is the Consumer Price Index (CPI) excluding food, energy, alcohol, and tobacco prices, was reported at 3.3% in July, a slight decrease from 3.5% in June, according to the statistics office.

Additionally, service inflation, which the Bank of England (BoE) monitors closely, decreased to 5.2% in July from 5.7% the previous month, yet still remains elevated.

These inflation statistics follow the release of data on Tuesday 13th July 2024, which revealed that the average wage growth excluding bonuses was 5.4% from April to June year-on-year, the lowest in two years.

Concurrently, the unemployment rate dropped to 4.2% during this period, down from 4.4% between March and May 2024.

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Bank of England cuts rate to 5.0% – the first since the Covid pandemic of March 2020 and from the highest rate for 16 years

Bank of England

The Bank of England (BoE) on Thursday 1st August 2024 announced its first-interest rate reduction in more than four years, taking the key rate to 5%.

Although numerous analysts predicted that the Bank of England might announce a reduction in interest rates at its August 2024 meeting, the absence of definitive signals from the central bank left the decision clouded in uncertainty.

The Monetary Policy Committee (MPC) ultimately cast a 5-4 vote in favour of the reduction, with Governor Andrew Bailey stating that the committee would proceed with caution.

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No change as Bank of England holds interest rate at 5.25%

UK interest rate

UK interest rates have been left unchanged at 5.25% by the Bank of England (BoE)

The Bank has maintained the interest rates at 5.25% for the seventh consecutive time to combat inflation, resulting in increased mortgage repayments and higher savings rates.

The interest rates, at their peak for the past 16 years, have been sustained at 5.25%. Currently, there are indications of a shift in stance, with a growing consensus for a potential reduction in August 2024.

UK interest rate and inflation chart June 2021 – June 2024

UK interest rate and inflation chart June 2021 – June 2024
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UK hits 2% Bank of England’s inflation target for the first time since 2021

THERE ARE TWO I'S IN INFLATION!

Inflation has reached the Bank of England’s target for the first time in nearly three years, having soared to 11.1% in October 2022, the highest in over four decades – driven by a spike in energy and food prices following the pandemic and Russia’s invasion of Ukraine.

In the year leading up to May 2024, prices increased by 2%, a decrease from the 2.3% rise in the previous month, according to official statistics.

The economy remains a central issue in the lead-up to the general election on July 4th, with all major parties discussing strategies to manage the cost of living.

This discussion precedes the Bank of England’s upcoming decision on UK interest rates this due on 20th June 2024.

The bank is anticipated to maintain the rate at 5.25% – a peak not seen in 16 years – for the seventh consecutive meeting, with the market not expecting a reduction until August 2024.

The decline in May’s inflation rate was attributed to slower price increases for food and soft drinks, recreation and culture, and furniture and household items.

Fuel pump prices remain high.

The inflation target has been achieved – it must be time for a reduction in interest rates.

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Banknotes with King Charles III enter circulation for the first time

King Charles on a Five Pound Note
Banknotes featuring a portrait of King Charles III entered circulation on Wednesday 5th June 2024.

Banknotes featuring a portrait of King Charles III entered circulation on Wednesday 5th June 2024.

Charles’s portrait will be featured on the front of the £5, £10, £20, and £50 banknotes, visible through the notes’ transparent security window. He is only the second monarch to appear on British banknotes, following Queen Elizabeth II.

Currently, there are more than 4.6 billion Bank of England notes in circulation, with a combined value of around £82 billion.

Bank of England

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IMF recommends UK interest rates should be cut to 3.5% by end of 2025

UK Charts

The International Monetary Fund (IMF) advises that the Bank of England should contemplate reducing its interest rates to 3.5% by the end of 2025.

This suggestion is made as the UK’s economy steadily recovers from the recession caused by the pandemic, while policymakers are dealing with inflationary challenges.

The ‘thinking’ behind the recommendation

Economic Recovery and Inflation Outlook

The IMF’s recommendation is grounded in its assessment of the UK’s economic trajectory.

Growth Forecast

The International Monetary Fund has upgraded its growth forecast for the UK in 2024, signaling a positive outlook. It anticipates growth of 0.7% this year and 1.5% in 2025.

Inflation

The IMF anticipates that UK inflation will decline to near the Bank of England’s target of 2% and stabilise at this rate in early 2025, indicating that inflationary pressures are within manageable limits.

Soft Landing

The UK economy is said to be approaching a ‘soft landing‘ following the mild recession of the previous year. Policymakers are focused on finding a balance between fostering growth and managing inflation.

Monetary Policy Considerations

The Bank of England’s Monetary Policy Committee (MPC) has been closely monitoring economic indicators and inflation trends. Here’s why the IMF’s recommendation matters:

Interest Rate Peaks

The Monetary Policy Committee has indicated that interest rates might have reached their peak. The current restrictive monetary policy is having an impact on the actual economy and the dynamics of inflation.

Market Expectations

Analysts anticipate the first interest rate cut by September 2024 at the latest. Market expectations align with this projection, with the base interest rate likely to be lowered to 4% by the end of 2025.

Balancing Act

Policymakers face the delicate task of supporting economic recovery while preventing runaway inflation. The IMF’s suggestion aims to strike this balance.

Implications for Borrowers and Savers

Mortgage Holders

Variable Rate Mortgages

If you have a variable rate mortgage, a rate cut could reduce your monthly payments. However, keep an eye on your lender’s response to any rate changes.

Fixed Rate Mortgages

Fixed-rate borrowers won’t immediately benefit from rate cuts, but they should still monitor the situation. If rates continue to fall, refinancing might become attractive.

Savers

Savings Accounts

Lower interest rates typically lead to diminished returns on savings accounts. It may be wise to diversify your investments to seek potentially higher yields in other areas.

Fixed-Term Deposit

Current fixed-term deposits will remain unaffected; however, new deposits might generate lower yields. It is advisable to carefully assess your alternatives.

Conclusion

The IMF’s recommendation highlights the intricate balance between fostering economic recovery and managing inflation. As the Bank of England considers its next steps, it is crucial for borrowers and savers to remain informed and adjust their financial strategies as needed.

For homeowners, investors, and savers alike, grasping the potential consequences of rate cuts is key to making well-informed choices in an ever-changing economic environment.

Disclaimer: The information provided here is based on current projections and should not be considered financial advice. It is not given as financial advice – it is for discussion and analysis only!

Consult a professional advisor for personalised recommendations.

Remember – always do your careful research first!

RESEARCH! RESEARCH! RESEARCH!

Update

The Bank of England has given its strongest hint yet that interest rates could be cut this summer. This comment was observed in a recent speech given by the deputy governor of the Bank of England.

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UK headline inflation rate falls to lowest in three years but comes in hotter than expected

The April inflation came in higher than anticipated, falling to 2.3%, as reported by the Office for National Statistics on Wednesday 22nd May 2024.

Traders have now reduced their expectations of a June interest rate cut by the Bank of England (BoE). Markets reacted negatively in early trading.

The headline inflation rate decreased from 3.2% in March, marking the first instance since July 2021 that inflation has fallen below 3%, nearing the Bank of England’s target of 2%.

Contrary to the predictions of economists surveyed by Reuters, who expected a more significant drop to 2.1%, services inflation – a critical indicator monitored by the BOE due to its significance in the UK economy and as a gauge of domestically generated price increases – only fell marginally to 5.9% from 6%, missing the anticipated 5.5% from the BOE.

Core inflation, which excludes energy, food, alcohol, and tobacco, decreased to 3.9% in April from 4.2% in March.

The substantial decline in the headline rate was largely anticipated due to the year-on-year decrease in energy prices. However, investors shifted their attention to core and services inflation following indications from BOE policymakers of a potential interest rate cut later in the summer, contingent on new data.

After the data release, the market-makers probability of a June rate cut plummeted to 15% from 50% and the chance of an August cut also fell to 40% from 70%.

Lingering concerns over underlying inflationary pressures mean a June rate cut is unlikely. However, these figures may convince more rate setters to vote to ease policy, providing a signal that a summer rate cut is still a possibility.

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UK interest rate held at a 16-year high as Bank of England holds rates at 5.25%

On hold

The decision comes as inflation, which measures price rises over a period of time, remains above the Bank’s 2% target at 3.2%. But bank says cuts are coming.

Is the 2% target still a sensible benchmark?

The 2% inflation target set by central banks has been a widely adopted benchmark for monetary policy.

History

The 2% inflation target became prominent in the 1990s and early 2000s. Central banks, such as the Federal Reserve and the Bank of England, have aimed to maintain inflation at this level.

The Federal Reserve has typically pursued an inflation rate of about 2% since 1996.

In January 2012, then-Fed Chairman Ben Bernanke formally established the 2% target, and subsequent Fed chairs have continued to endorse this rate as the preferred level of inflation.

Why the 2% target?

Price stability

The 2% inflation target was selected as it provides a balance between preventing problematic inflation and avoiding damaging deflation. Does it work?

Avoiding deflation

Deflation, characterized by falling prices, can hinder economic growth. Central banks target a 2% inflation rate to avert deflation and ensure stability.

Creditor-Debtor compromise

The 2% inflation target represents a balance between creditors’ preference for lower inflation and debtors’ inclination towards higher inflation.

Challenges

Changing economic environment

In recent years, the global economy has encountered distinct challenges, including sluggish growth, technological upheavals, and demographic changes. Consequently, there is a debate on whether the 2% inflation target requires reassessment.

Persistently low inflation

Despite the efforts of central banks, inflation has persisted below the 2% mark in numerous advanced economies, sparking debates over the potential need to modify the target.

Trade-offs

Aiming for a 2% inflation rate can occasionally clash with other policy objectives, like employment or financial stability. It’s crucial for central banks to judiciously manage these competing priorities.

Revision

Several central banks are revising their strategies. For example, the European Central Bank (ECB) has adopted a more adaptable inflation target, permitting temporary exceedances to balance out extended periods of below-target inflation.

The Bank of England also considers broader economic factors when setting policy, rather than rigidly adhering to the 2% target.

IIn summary, although the 2% inflation target has been a helpful benchmark, central banks are progressively willing to adjust their strategies in response to evolving economic conditions. The current debate focuses on striking an optimal balance between stability, growth, and adaptability.

Central banks saw this period of inflation as ‘transitory’ – it wasn’t. It could be argued that their lack of action led to a bigger inflation problem overall.

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FTSE 100 in record territory

The FTSE 100 soared past 8300, reaching a new record high amid busy trading as London markets reopened after the bank holiday.

A catch-up trading session is evident, with mainland-listed stocks having a robust session on Monday 7th May 2024 and continuing to rise. The FTSE reached around 8335 in intraday trading.

Wall Street also experienced another positive session, with the Dow Jones climbing for the fourth consecutive day following the Federal Reserve’s less aggressive stance, and the S&P 500 gaining too. Despite mixed results, earnings have bolstered risk appetite. The low U.S. job count has encouraged traders/investors to take heart that rate cuts will be on the agenda again soon, even if they are now late.

Bank of England

Attention will now turn to the Bank of England (BoE), which faces a decision on whether to guide the market towards a rate cut – the first in four years – or to exercise more patience. The consensus is that it’s premature for a cut this week, with August 2024 being the more likely date, although the Monetary Policy Committee’s (MPC) opinions vary.

Last month the Deputy Governor of the BoE, indicated his readiness to vote for a rate cut with little additional evidence of declining inflation, highlighting the ‘downside risks’ to the BoE’s February inflation forecast. In contrast, the Bank of England’s Chief Economist, expressed a more cautious stance in April regarding the initiation of rate cuts.

Inflation

Inflation is on a downward trajectory, expected to return to 2% in the next few months. CPI decreased from 3.4% to 3.2% between February and March 2024, and core inflation dropped from 4.5% to 4.2%. However, the BoE is likely to await April’s data before taking any decision.

Persistent wage growth of around 6% indicates continued strength in the labour market. Financial markets anticipate a Bank of England rate cut by August 2024, but it is believed the BoE may be prepared to act as early as June 2024, aligning with the anticipated policy move by the ECB.