10 May 2018
Only a few weeks ago, it was almost a given that base rate would reach 0.75% today.
But frustratingly for savers, a rapid shift in economic data has led to the Bank of England’s (BoE’s) decision to freeze base rate at 0.5% – the level it plunged to following the financial crisis ten years ago.
So how has the picture changed? Does today’s decision affect markets? And are we likely to see a rise at all over 2018?
We speak to our very own experts to find out…
At the start of April, markets had confidently priced in an 85% probability of a rate rise this month. Inflation was high and the economy seemed relatively resilient. Mark Carney, governor of the BoE, even warned in February that – if the economy remained on track – rates could rise sooner and faster than previously forecast.
But such expectations were soon diminished – after Carney suggested a few weeks ago that economic data had become ‘softer’, inflation was falling faster than anticipated, and the uncertainty around Brexit lingered.
Mitch Hargreaves, Money Market Analyst at Skipton explained, “Increasing base rate is the Bank of England’s key policy tool for controlling high inflation. Back in January, the Consumer Price Index (CPI) was at 3% – above the Monetary Policy Committee’s (MPC’s) 2% target. But in February and March, CPI fell by more than expected – and now sits at just 2.5%, lessening the need for the MPC to take policy action.
“Recent economic data publications have painted a somewhat gloomy picture for the UK. As well as inflation slowing, sentiment indicators have been weak, the high street continues to struggle, and quarter one 2018 Gross Domestic Product slowed by more than expected to just 0.1% (the weakest period of growth in five years). Crucially, the Office for National Statistics conceded that the bad weather had only had a relatively small part to play in the slowing growth, indicating broader-based weakness in the economy that could not be chalked up to transitory effects. It was for this reason that despite a further narrowing in unemployment and steadily rising wages – which point to dwindling slack capacity in the economy – policymakers ultimately decided that a rate hike could not be justified in the current economic climate.”
Many would argue that the economy is nowhere near as bad as it was following the 2008 crisis. “This has been the debate over the past few years,” Mitch added. “The economy may be in better shape than in the wake of the financial crisis, and the Bank of England would doubtless like to see rates move higher so that they have more policy options available should a new recession hit. As the recent data shows, however, we are still not fully out of the woods, and policymakers have demonstrated they will not subject the economy to higher rates until they are confident it has the resilience to withstand them.”
Have markets been affected?
Markets and the economy are essentially two separate entities – so when the BoE decide to raise rates, there is a definite market reaction. Yet while they are detached, the two can sometimes work together – with one affecting the other.
“The impact on markets from the decision not to raise rates is difficult to gauge over the long-term. But what we do know is that, in the short-term, it can generally be good for businesses – as they can continue to borrow money cheaply to support their plans. This can have a positive effect on shares prices and in turn, markets.
“When it was confirmed on 18 April that a May rate rise seemed unlikely, markets reacted positively – and the FTSE100 reached its highest level in three months. As today’s announcement from the BoE will have already been priced in by markets, investors are unlikely to see a drastic change.”
Will we see a rate rise before the year is out?
Earlier in the year, BoE forecasts suggested two possible rate rises this year. Now that today’s hike hasn’t transpired, the possibility of there being two is indeed slim. But the question is: can we expect to see a rise at all by the end of 2018?
Daniel Howard, Technical Research Manager at Skipton, stated, “Markets remain confident that rates will still go up this year,” Mitch confirmed. “At the time of writing, a hike by November almost 100 per cent priced into the market.
“At this stage, though, that level of confidence smacks of complacency. If this episode has reminded us of one thing, it is that a fortnight can be a long time in financial markets. Six months is an age.”
So what does this mean for long-term savers?
Today’s announcement emphasises that interest rates are rising slower than expected – and you simply can’t assume they’ll reach the levels they were at over a decade ago.
As a result, saving towards the future remains a huge challenge. But fortunately, there are other options available that could help you achieve the long-term returns you need – such as investing.
Through a face-to-face review, we can assess your savings and investments to make sure your money is suitably positioned against your financial goals. For more information you can request a call back. Or, visit our investment planning page.
Please remember that stock market-based investments are not like bank and building society savings accounts as your capital is at risk and you may get back less than you invested. The value of your investments and any income from them may fall as well as rise.
The opinions and analysis provided are for information only and do not constitute financial advice.