After the Bank of England agreed to cut interest rates, investment managers discuss the impact on inflation, mortgages, the economy and asset allocation.

The Bank of England decided this week to cut the interest rate by 25 basis points to 5 per cent, the first reduction since March 2020, in line with market expectations

The bank’s monetary policy committee (MPC) voted five to four to cut rates, with inflation at its 2 per cent target level. The dissenters preferred to keep rates on hold.

However, inflation is expected to start rising again in the second half of the year, from 2 per cent to 2.75 per cent, before returning to its 2 per cent target next year. In view of this, BoE governor Andrew Bailey has indicated that there is unlikely to be a flurry of interest rate cuts over the next few months. “We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he said.

UK Chancellor of the Exchequer Rachel Reeves welcomed the news but said millions of families are still facing higher mortgage rates. 

Here are some reactions from investment managers to the decision.

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley)
“The important point is that inflation in the UK is now at the 2 per cent target. Keeping rates too high for too long would have caused unwarranted economic weakness and therefore, an undershoot of the bank’s inflation mandate to the downside. Even though it makes sense to proceed at a moderate pace, beginning to soften the degree of monetary tightening looks like the most sensible approach.

“For quite some time, we’ve been underweight UK gilts in the ‘balanced’ portfolios, those with a mix of equity and fixed-income exposures. It wasn’t clear when the Bank of England was going to cut interest rates and, if one really wanted to increase fixed-income exposure, European investment-grade corporate bonds offered more compelling yields. More recently, however, we’ve increased our exposure to short-dated gilts. This is because short-dated bonds are most sensitive to central bank rate changes. With the Bank of England having just cut rates and likely to continue to do so, one-to-three-year gilts could benefit, as prices rise when yields fall.”

Jonathan Moyes, head of investment research at Wealth Club
“Whisper it quietly, but an economic revival appears to be gathering pace. Recent survey data suggests the UK’s services and manufacturing sectors are performing strongly, unemployment remains low, house prices have resumed their upward trend, and the country is in a rare state of political stability. With the UK on such a positive path, the interest rate cut will add further fuel to the UK’s recovery, but this does pose questions over whether the bank risks unnecessarily stoking inflation. By the Bank’s own forecast, inflation is set to rise to 2.75 per cent in the second half of 2024.

“Looking ahead, the Bank of England remains damned if it does, and damned if it doesn’t. All eyes will now be on sterling, with the US Federal Reserve choosing to keep rates on hold, sterling has weakened in the minutes following the announcement. Too much of this, and the bank may regret its newfound assertiveness.”

Tom Hopkins, senior portfolio manager at BRI Wealth Management
“The bank had held rates at a 16-year high of 5.25 per cent since August 2023, as it attempted to tackle inflation. It comes after headline inflation held at the bank’s 2 per cent target for a second consecutive month in June, having fallen from a peak of 11.1 per cent in October 2022. Today’s cut, whilst it is only 25 basis points will have a greater effect on UK sentiment. A rate cut will likely to lead to lower mortgage repayment deals, making consumers feel more positive. On the financial markets, immediately after the announcement, we are seeing some rallies in the more interest rate sensitive sectors such as retail and property, where the interest rate uncertainty has been a dark cloud hanging over these sectors for the last two years.”

Hetal Mehta, head of economic research at St James’s Place
“This was clearly not a straightforward policy move, as evidenced both by the vote split and the finely balanced nature for a number of MPC members. The Bank of England does expect inflation to nudge up again before coming back down. The pace of cuts will become an increasing part of the debate, but big and/or back-to-back moves would be reserved for an economic shock. The overall tone is in line with the policy normalisation we have been anticipating.”

Luke Bartholomew, deputy chief economist, abrdn
“Attention will now turn to how far and how quickly interest rates will fall from here. The bank’s signalling talks of the risk of cutting “too quickly,” but its own forecasts imply that inflation will come in well below target in a couple of years if interest rates follow the path currently priced into markets. This might be a signal that the majority of policymakers are expecting to cut more than the market currently forecasts. We tend to agree with that assessment, and expect rates to fall further over the next six months. But ultimately it is the data that will determine how interest rates evolve from here, with the bank hoping its conviction that underlying inflation pressures are fading will be vindicated.”  

“Advisors will play a pivotal role in helping clients understand what will influence future rate decisions and re-assuring them that their strategies are poised to succeed in a lower rate environment,” Jonny Black, chief commercial and strategy officer at abrdn adviser, added.

Nick Henshaw, head of intermediary distribution at Wesleyan 
“This rate cut has been expected for some time and we know through our research that most advisers have already taken steps to increase their clients’ exposure to equities in anticipation.

“It remains to be seen when there are likely to be further reductions in the months ahead, particularly given the uncertainty over the trajectory of inflation, but in the meantime advisors can take steps to help their clients manage the transition to a lower interest rate environment. One potential option is smoothed funds, which can provide a middle ground for clients as they continue to reduce their cash allocation by reducing volatility and helping to moderate risk.”

David Zahn, head of European fixed income at Franklin Templeton  
“This is the start of an interest rate cutting cycle that should see interest rates move back towards 3 per cent in the UK. This should be very supportive for UK Gilts across the curve, and we would maintain a long duration position in UK Gilts. The inflation forecasts for 2026 and 2027 are both below the BoE target of 2 per cent further reinforcing that the MPC should continue to cut rates in the coming year. The impact of sterling should be rather muted as the BOE is moving with the European Central Bank (ECB) and Fed anticipated rate cuts. The potential major distraction to the BoE cutting rates further will be from the UK budget announcement at the end of October.  If that comes in as expected, the BOE will have clear support to continue rate cuts into 2025.”

Michael Browne, CIO at Martin Currie
“The MPC has found that they no longer can resist the pressure of falling inflation to cut rates. They will no doubt wish to signal that the rate of cuts will be few and far between. We are more optimistic, and that this stance will prove to be unsustainable, in particular if the Chancellor delivers a fiscally neutral budget on 30th October. In this environment, we continue to favour the interest rate sensitive sectors of house builders, real estate , utilities and in particular the green energy sector.”

Julian Jessop, economics fellow at the free market think tank, the Institute of Economic Affairs
The aim should now be to return rates to a neutral level of around 4 per cent by early next year. The bank’s own economic forecasts point the way. Inflation is expected to pick up temporarily in the second half of this year, but then fall back to 1.7 per cent in two years and to 1.5 per cent in three years, even based on market expectations of further rate cuts.

"The economy has been a little stronger than expected, but this is partly based on hopes that falling inflation will be followed by falling rates. The bank needed to deliver in order to sustain the recovery. Even at 5 per cent, interest rates are still high and will therefore continue to bear down on inflation, especially as the bank is persisting with quantitative tightening as well.

"There are still some reasonable concerns about services inflation. But with overall inflation still forecast to fall below the MPC’s 2 per cent target over the medium term, leaving rates on hold would have been more damaging for credibility than a small cut."

Mo Kazmi, portfolio manager and macro strategist at Union Bancaire Privée (UBP) Asset Management
“We have seen little reaction in gilt markets as a rate cut either today or at the next meeting was already well priced. Furthermore, comments in the press conference clearly emphasise how the committee remains concerned around the risks of inflation persistence, rather than using the first cut as a moment to declare victory on inflation. This cautious and data dependent approach is similar to what we heard at the ECB during its first rate cut in June, and highlights ongoing uncertainty globally with regards to the outlook for inflation given persistent services inflation across developed economies. As central banks including the BoE commence their cutting cycle, we anticipate this cycle to be very gradual in nature as a result and given that growth indicators are holding up well, if not reaccelerating in the UK which reduces the need for urgency.”

Peder Beck-Friis, economist at PIMCO
"Looking ahead, we expect the BOE to proceed cautiously from here. We think another cut in September is unlikely, unless incoming inflation and labour market prints surprise to the downside, and expect the next cut in November as a baseline. Further out, however, we see room for the BOE to cut more than financial markets expect — as tight fiscal policy, a cooling labour market, and a likely low neutral rate should allow more rapid cuts next year and beyond. We continue to find gilts attractive at current levels, especially the belly of the curve."