Interest Rates Begin To Fall - will Bank of England follow suit?

The European Central Bank has cut its key deposit rate to 3.75% - so moving faster than the Bank of England and the Federal Reserve in cutting rates.

Markets have been pricing in two or perhaps three cuts in total by the ECB by the end of the year, just as they have the Bank of England - but when will the BoE act?

Susannah Streeter, head of money and markets at business consultancy Hargreaves Lansdown, says: “The ECB reduction will come as a relief for many consumers and companies, whose finances have been stretched to breaking point by the rapid ratcheting up of interest rates. But ECB policymakers are expected to hit the pause button now, as sticky inflation has returned as a worry. While rates went straight up like a rocket, they look likely to descend in bumpy fashion.

“Financial markets have been pricing in two to three rate cuts in total by the ECB by the end of the year, but it’s looking unlikely that that policymakers will vote for another move lower next month. Caution is set to stay the name of the game, as they await fresh indications about inflation’s path.

“Headline inflation went in the wrong direction at the last count, heading away from the ECB’s 2% target. It rose by 2.6% year-on-year in May, compared to 2.4% for the previous two months, a larger increase than expected. Prices in the services sector, seen as a good indicator of domestic demand, also jumped to 4.1% from 3.7%.

“However, the overall direction of travel is clear – and it’s downwards.

“The ECB decision will raise hopes that UK interest rates will also be brought down sooner rather than later. The data coming in over the past few days has been more positive for the Bank of England, indicating that price pressures are easing. So an interest rate cut in August is still a very real possibility, although the financial markets have not been fully pricing in a cut until November.”

Speaking to the Newspage agency, Justin May of EHF Mortgages says: “This first cut in five years from the ECB gives the Bank of England the licence to cut the base rate at its June meeting. This, in turn, will see swap rates edge down, resulting in lower mortgage rates. Elections need to be mutually exclusive to these decisions, ensuring that borrowers start to benefit immediately from the austerity measures of the past few years.”

Not every broker agrees.

Dariusz Karpowicz tells Newspage: “I’m not convinced that the Bank of England will follow the ECB's decision to cut rates. There are far too many unknowns, and the upcoming General Election and mixed signals from the UK economy add to the uncertainty. While the ECB’s move to ease monetary policy is a positive sign for taming inflation, the Bank of England might take a more cautious approach given the current economic climate and political landscape.

“If the Bank of England does decide to cut rates, it could potentially benefit UK borrowers by making mortgages more affordable, sparking some much-needed activity in the property market. However, lenders might initially react with caution, adjusting their rates more gradually as they assess the broader economic impacts.

“For the wider property market, a rate cut would likely be welcomed as it could improve buyer sentiment and affordability. But for now, it’s a waiting game to see how the Bank of England will respond and whether they’ll join the ECB in easing monetary policy.”

The BoE meets to decide on base rates on June 20.