Bank of England holds rates at 5.25%

What happened?

The Bank of England has held interest rates at 5.25% for a second consecutive month. Six members of the Monetary Policy Committee voted for rates to stay the same, while three voted for an increase.

The decision to hold interest rates is what the market expected, said a number of asset managers in response. The impact of the previous rate hikes is still feeding through into markets, with many commentators expecting economic growth to slow further in the coming months.  

The real question is when a cut can be expected, which markets are currently pricing into the second half of 2024.  

Lewis Grant, senior portfolio manager for global equities at Federated Hermes Limited said: “The question investors face is no longer ‘how high?’ but ‘how long?’. Inflation remains above the target rate of 2% and the job market is continuing to show remarkable strength; this is not the right environment for a rate cut. It may not take a recession to control the economy and provide the right opportunity to cut interest rates, but a slowdown in growth will likely be required.”

What does this mean for investors?

UK gilts are looking more attractive, according to Georgina Taylor, head of multi asset strategies UK at Invesco. “Some more hawkish members of the MPC that are erring on the side of over-tightening, believe monetary policy can respond swiftly further down the line should the economy significantly deteriorate, and thus believe it is prudent to keep policy tight until it is clearer that inflationary pressures have subsided. The doves on the committee have a greater focus on the flexible inflation mandate of the BoE and see economic weakness as a medium-term threat that should be addressed.

“This debate will keep the market guessing on the policy over the coming months but in the face of a slowing economy and reaching peak rates, we believe the coos from the doves will get louder and UK Gilts are now an attractive addition to our multi asset portfolios.” 

Grant added: “We have a keen eye across the value, quality, and growth spectrum. Stability in rates will support value opportunities in the short term. As uncertainty remains, we continue to expect quality to perform well.

“We anticipate a split in prospects for growth names: earlier stage companies will be penalised for burning cash in the face of changing consumerism. However, those with strong balance sheets and whose growth can tap long term secular change – sustainability being the most obvious - are set be well positioned when interest rates are cut.”

What’s the impact on pension schemes?

Chris Arcari, head of capital markets at Hymans Robertson, said: “Rises in long-term bond yields, of course, go hand in hand with declines in the value of long-term bonds.  But viewing pensions purely from the asset side is incomplete, in our opinion.

“A rise in long-term yields will reduce the value of a defined-benefit pension pot from a member’s perspective, but that’s because the rise in long-term yields has reduced how much it costs in today’s money to provide promised, fixed benefits.  

“Indeed, that’s why, on average, defined-benefit pension scheme funding levels have improved rapidly over the last two years – higher yields mean the promised pensions are ‘discounted’ at a higher rate, so the overall liability has fallen (in most cases, more than assets have). 

“Similar thinking can also be applied to defined contribution pension pots.  For those heavily invested in long-term bonds, the value of their pots will have declined over the last two years. However, longer-term yields mean annuity rates have risen rapidly, so it’s now cheaper to buy a retirement income.”