"A BBR of 3% at some point in the next 12-18 months doesn’t feel like a distant or impossible possibility. "
It’s intriguing to read the comments of a number of Monetary Policy Committee (MPC) members, including the Governor himself, over the last days all attempting to pour cold water on expectations that Bank Base Rate (BBR) will be cut, and cut aggressively over the next 12 months.
However, you have to wonder whether this is likely to be the course of action that unfolds, especially given what has happened across the pond, and what is likely to be happening to US rates during the rest of the year.
Now we don’t wish to push the ‘US sneezes, UK catches a cold’ metaphor too much here, but you can guarantee our MPC is going to be influenced by what the Fed has already done, and what it decides to do next.
A pretty aggressive 0.5% cut in the States, with a forecast that it will cut by a further 0.75% before the end of 2024, may well play a significant part in what happens here, and the noises we are hearing about a cautious approach to cuts might be blown out of the water by necessity and events.
Indeed, while some have ridiculed the recent Goldman Sachs prediction that BBR will be at the 3% level by September 2025, we can see it being very close to this if not exactly at this point.
Given the MPC didn’t act in September, despite inflation being very close to target, we might all anticipate that on both the 6th November – the day after the US Presidential Election we might add – and the 18th December, there is a growing chance that a further 0.25% cut could be made.
If so, that would take BBR down to 4.5% and, while we would probably have to see cuts at almost every meeting during 2025, it’s not beyond the realms of possibility that we get to 3% over the course of the next year.
The Governor, Andrew Bailey, suggested borrowers should not anticipate rates falling back to near-zero levels again. The good news for him is that we’re sure there is not a borrower in the land who believes the rate levels of the 2010-2022 period were normal, given they took place against the backdrop of extraordinary situations such as the Credit Crunch, the vote to leave the EU, and the pandemic.
Bailey said the best we might hope for, and his best guess, would be a return to a ‘neutral rate’. Now, you might question what is a ‘neutral rate’ and it’s a rate which doesn’t stimulate or restrict economic growth and one based on stable inflation/prices – economists tend to believe that the UK’s neutral rate over the next 10 years is 3%.
So, as you might see, a BBR of 3% at some point in the next 12-18 months doesn’t feel like a distant or impossible possibility.
However, with the somewhat major caveat being that events elsewhere are always going to have a huge impact on what rates we might all get. World events in particular will shape our economy – what might happen with a Trump Presidential victory, what might happen if the war escalates in the Middle East, what might happen in Ukraine, or even Taiwan? These are all unknowables which once known are likely to have a significant influence on us.
Closer to home, what we do tend to know is that right now, even without any BBR cuts, lenders are positioning themselves to make up for what has been a prolonged subdued period, made even worse by the fact we have all been waiting an age for a Budget.
The rate cut in August did have a temporary boosting effect, but since all the talk of abject UK finances, of £19bn blackholes, of the need for cuts and various tax rises, unsurprisingly many people who would have acted more recently are now sitting on their hands waiting to see just how ‘terrible’ the Budget will be for them. It’s a real clanger from the Labour Government and they need to learn quickly from this.
In the throes of this (hopefully) temporary malaise in activity, we do have lenders trying to make the market work better for them, hence the raft of rate cuts and jumping over each other on price, which have brought product rates down. These are likely to hold until the end of the year at least, as lenders seek to start the filling of early 2025 pipelines, and by then we might also have a couple more BBR rate cuts and, at least, some post-Budget certainty that might allow more people to act.
2024 has been a challenging year so far and we should not expect this to change much in the three months left. However, with some judicious rate/mortgage price cutting, and a Government that decides not to hammer every single person in the country, we do have the route to a healthier market. Fingers crossed for us all.
