UK interest rates are expected to start to fall from May next year.

The BoE Chief Economist Huw Pill has hinted that ‘it is not unreasonable’ to predict a rate cut next summer. This is the clearest signal yet that the BoE is at the peak of interest rate rises.

Financial markets are pricing in a rate cut next June and a cut from 5.25% to 5%. Inflation is currently 4.6% which is over double the target rate, however Mr Pill predicts a rapid fall in the coming months.

The comments of Mr Pill do however conflict with the public statements of BoE Governor Andrew Bailey who has said that ‘it is much too early to consider rate cuts.’ Mr Bailey is renowned for caution.

Despite the Governors view, markets now believe that the UK has finished its rate rising cycle and that UBS forecast that UK interest rates will be at 4.25% in December 2024 and 2.5% in December 2025. PWC have predicted that UK inflation will continue to fall throughout 2024.
The fact that the ECB, Fed, and BoE have all paused interest rate rises and that employment growth has softened suggests that ‘higher for longer’ interest rates may not be the case in 2024.

Bond yields have been rising and are now starting to fall so now is an opportune time to consider the allocation to fixed interest and the durations of gilts and treasuries.

Cash and short dated credit have been the assets of choice recently. The pivot in monetary policy can give bond investors an attractive yield and the potential of a capital gain as yields fall and prices rise. For this reason, we have increased our allocation to US treasuries and UK gilts.

The yields on UK 10-year gilts fell from 4.65% on 19th October to 4.28% on Friday 24th November based upon the expectations of the BoE cutting interest rates. This is a great boost to Chancellor Jeremy Hunt, as well as borrowers and mortgage holders.

Analysts are expecting UK interest rates to start to fall from May next year much earlier than previously forecast. There is an expectation that UK interest rates will fall by as much as 1% throughout 2024.

There are some differences of opinion within the banking sector with Goldman Sachs suggesting a February first cut, while Morgan Stanley say May for the first interest rate reduction. The Nationwide Building Society believe rates will not fall untill 2025.

While bond yields have been falling on the expectation of lower interest rates, the BoE have also been selling off government bonds and in doing so reducing the size of the BoE balance sheet and taking cash out of the economy. The gilts issued by the government during the pandemic are now being sold at a loss rather than being kept to maturity. This means that the UK tax payers are picking up capital losses on these gilts. It is suggested that the premature sale of gilts will cost £15bn more than if kept to maturity. One must ask who is making these decisions?

---

Comments are closed.