Commentary: Interest rate hold announcement

Commenting on the interest rate hold from the Bank of England, William Marshall, Chief Investment Officer at Hymans Robertson Investment Services (HRIS) says:

“With yesterday’s announcement that inflation was back at the Bank of England’s 2% target, people are probably wondering why the BoE hasn’t started cutting interest rates. A month ago, an interest rate cut at today’s meeting looked to be on the cards. However, the April inflation data more or less ended hopes of that even before yesterday’s data, despite a large drop in headline CPI. This is because the decrease was already expected owing to the fall in the energy price cap. Other measures of inflation, like Core and Services inflation, which can give a better indication of domestic price pressures, don’t look so positive.  Core inflation, which excludes volatile items like food and energy, is still at 3.5%, while Services inflation has only fallen 0.3% to 5.7% over the last two months. The BoE won’t necessarily wait until Core and/or Services inflation is back at 2%, but they will want to see more evidence that it is on a sustainable path towards target.

Recent labour market data also showed persistence in high wage growth which will sustain services inflation. However, a large part of the April data will reflect the 9.8% increase to the National Living wage, meaning wage growth may fall in the near future to levels more consistent with 2% inflation. The BoE will be looking for signs of this when considering a rate cut at the August meeting.

The prospect of near-term interest rate cuts increases the attractiveness of bonds (where higher rates can be locked in) over cash for investors.”