The Bank of England (BoE) Monetary Policy Committee voted 5-4 in the first week of August in favour of cutting interest rates. The narrow decision saw interest rates slashed by 25 basis points from a 16-year high to 5%. However, BoE's Governor Andrew Bailey has noted that the central bank will be cautious with its monetary policies and rate cuts in the near future.
This decision is likely to stir up various markets, including real estate, stocks, and fixed-interest products. The most immediate effect would be a further lowering of borrowing costs and inflation, which hit BoE's 2% target in May for the first time.
Let's look at some of the key talking points following this rate cut.
More about Bank of England's August rate cut
The BoE's decision to cut rates marks the first change since March 2020, ending the longest period rates have been left unchanged at the peak of a BoE tightening cycle since 2001. This move comes as inflation returned to the BoE's 2% target in May and remained there in June, down from a 41-year high of 11.1% in October 2022.
Despite this progress, the BoE expects headline inflation to rise to 2.75% in the final quarter of the year due to increasing energy prices. This projection speaks to the bank's cautious approach to future rate cuts.
The UK economy has shown signs of resilience, with the BoE revising its growth forecast for 2024 to 1.25%, up from the previous 0.5%. This upward revision reflects stronger-than-expected growth during the first half of the year.
Wage growth, currently at nearly 6%, remains a concern for the BoE as it's almost double the rate viewed as consistent with 2% inflation. However, it is slowing in line with the central bank's expectations.
Unemployment is expected to rise slightly as high interest rates continue to bear down on growth, which should help reduce upward pressure on inflation.
Bank of England rate cut - Key talking points
We expect the impact of the rate to be felt across all investing sectors.
For bond investors, the rate cut could lead to an increase in bond prices, particularly for longer-dated bonds. UK Gilts may become more attractive, potentially leading to lower yields.
Property investors might see a mixed impact. While lower interest rates could make mortgages more affordable, potentially boosting the housing market, it could also lead to increased competition for rental properties as more people consider buying.
The stock market often reacts positively to interest rate cuts, as lower borrowing costs can boost corporate profits. However, the reaction may be muted given the cautious tone set by the BoE.
For fixed-interest investments like property loan notes, the rate cut could make these instruments more attractive relative to savings accounts, potentially driving increased demand.
Pension considerations: For expats with UK pensions, the rate cut could impact annuity rates and the performance of pension funds invested in fixed-income securities.
Fixed-income investments: While lower rates might make some fixed-income investments less attractive, they could increase the appeal of higher-yielding alternatives like corporate bonds or property loan notes.
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At International Wealth Ventures, we understand the unique challenges and opportunities facing expat investors in light of these economic changes. Talk to us today.