Andrew Bailey
The Governor of the Bank of England (BoE), Andrew Bailey, was in the spotlight yesterday for the right reasons. That hasn’t necessarily been the case in recent times, more on that later. The good news for the 1.3m mortgagees with either a tracker or variable mortgage is that the BoE cut interest rates by a quarter-point to 4.5%, the third such cut in the current cycle spanning six months.
The picture for the approximately 800,000 households on fixed term mortgages expiring in 2025 is more complex, dependent upon whether they are coming off a two-year or five-year fixed rate. Swap markets are focused on the background commentary and nuances aired by Governor Bailey and are now pricing in a further two rate cuts this year, with a 55% chance of a third.
To be fair, Andrew Bailey is sitting between a rock and a hard place concerning monetary policy, thanks in no small part to the direction the Chancellor is driving fiscal policy. Off a cliff being the damning verdict of the Opposition and prominent members of the business community. The imminent increase in employer funded National Insurance (NI) contributions and higher minimum wages is casting a pall over the employment market with economic growth barely flickering above zero.
The dilemma for the BoE is that supporting the government’s economic policy, inclusive of its objectives on growth and employment, is not its only core objective. There is the small matter of keeping a lid on inflation, targeted at 2%, hence why the UK experienced 14 consecutive rate increases between late 2021 and mid-2023.
Last September markets were factoring in at least four quarter percent cuts in 2025, before a spanner got thrown into the works by inflation edging higher, registering 2.6% in November. It marginally eased to 2.5% % the following month on the back of cheap EasyJet flights to Spain. So, the conundrum for Andrew Bailey is, does he stick or twist? Raise interest rates to counter inflation or cut them to support economic growth? For the moment, it appears the latter.
In an ominous warning for the government and a Chancellor under siege, the BoE is forecasting inflation to rise to 3.7% in the third quarter of this year and economic growth to be just 0.75% in 2025, half its forecast number just three months ago. The prospect of stagflation edges ever closer. The good news is that it expects inflation to recede to 2.5% in 2026 and return to its target range of 2% in 2027.
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Spoiler alert. This is the point where it’s worth recalling that the governor and his minions of economic boffins in Threadneedle Street failed to forecast the specter of runaway inflation post-pandemic when consumer demand was on steroids and global supply chains were in tatters. The mitigation offered is that Governor Bailey was hardly Robinson Crusoe on this score. In fact, it was only the Reserve Bank of Australia’s (RBA) Philip Lowe who lost his job over this debacle.?
Never mind, by cranking up interest rates to a generational high to counter double-digit inflation, it was a case of job well done. But you could excuse mortgagees and those in the rental market consigned to the role of innocent bystanders in the Cost-of-Living Crisis for failing to feel grateful that the cure doled out by the BoE seemed worse than the illness.
The bottom line is this. In an increasingly volatile global economic environment consumers would be well advised to do two things. Firstly, exercise a healthy degree of skepticism towards experts proffering forecasts more than three months out. Secondly, clearly understand their own tolerance for risk as a critical input into their financial decision-making.