(Note, you may recall that March 2020was significant)

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August opened with a flourish as the Bank of England Monetary Policy Committee [finally] announced a 0.25% cut in the Base Rate of Interest. This news came as relief to many UK homeowners - those that have shouldered the inflationary burden through increased mortgage payments and/or those that are scheduled to remortgage within the next 24 months.

This small reduction marks a significant shift in the monetary approach following a year of “holds” at 5.25%, and hints at the cascade to follow. The pace of these reductions is unknown – there are several conflicting economic indicators -, but the markets believe the chance of a further 0.25% reduction in November is 92%. Long-term cash prices further evidence the direction of travel over the longer-term with rates currently anticipated to fall to circa 3.5% by the close of 2025.

I touched on the variables and the opposing forces at play…

Government and the BoE rhetoric have been focussed on stifling demand and cooling inflationary pressure for some time, and we have witnessed the deployment of quantitative tightening measures for this purpose –for example, allowing treasury bonds to mature (reducing the money in circulation) and hiking interest rates. With inflation levels more manageable – CPI announced at 2.2% -, these measures have been [in-part]successful in their aims and have opened the door to reducing Base Rates, as households, business, and markets desire.

As Andrew Bailey (Governor of the Bank of England) stated, “rates will remain higher for longer” to entrench the consumer and business sentiment and prevent secondary inflationary spikes.

However, recent policy decisions have acted to counter these actions and put additional money into circulation, driving inflation. The most notable of these factors being the public sector pay-rises and the 10% increase in the national living wage. These decisions span two administrations and act to skew the market clearing price. As an additional layer, the comparison and perceived value of jobs acts as an upward pressure on other employees and sectors - the ‘sticky’ wage inflation which has been cautioned and used as rationale for higher interest rates.

Of course, geopolitics also remains a key influencer and the unstable situations in Ukraine & Russia and The Middle East, alongside other conflicts (political, physical and economic), cause supply-side issues. As supply falls, prices increase, ceteris paribus, and the affect is spiralling costs. The primary driver behind both the inflationary peaks and the subsequent year-on-year falls has been the cost of energy.

As the world’s largest economy, the actions of US Federal Reserve will lead. Their approach to, and perception of, the threat of US recession created by falling demand for employment, will infiltrate much of the Western World. The panic surrounding the US job market alone, sent shockwaves through the global markets and put many into a state of “correction” (a fall in value of over 10%). I outlined the net inflows of investment and the resulting climbs in the Japanese and US markets in late spring, and these were two of the areas hit hardest by the news, and the lack of movement by the Fed. It’s also the added value that a financial professional may add when suggesting portfolio ‘switches’ and ‘rebalancing’ to crystallise high prices and retain appropriate asset exposure.

How this multi-faceted dynamic bridges into the spending habits and spending power of the UK will influence the approach taken by the Monetary Policy Committee going forward and the speed in which rates reduce to a more favourable level. The “hold” phase appears to be waning and crucially, the outlook is more promising for property owners, businesses and investors.

If you’re concerned, see opportunity, or your loan term is expiring, discussion with an IFA can offer valuable guidance.

Rob Cowsill – IFA @ SW Financial Planning