Client Affairs
UK Inflation Drops By Less Than Expected To 2.3 Per Cent – Wealth Managers React

After UK annual headline inflation came in close to its 2 per cent target in April, but still higher than expected, wealth managers discuss the timing of a potential interest rate cut and the impact on asset allocation.
UK annual headline inflation came in at 2.3 per cent in April, down from 3.2 per cent in March, reaching its lowest level since July 2021, caused by easing energy and food costs, according to data from the Office for National Statistics. It was forecast to come in at 2.1 per cent, reducing hopes of an early interest rate cut in June.
Core inflation, which strips out energy and food costs, came in at 3.9 per cent, higher than the 3.6 per cent forecast, and down from 4.2 per cent in March.
The Bank of England’s Monetary Policy Committee (MPC) decided to hold interest rates at 5.25 per cent at its meeting in May, which was expected by the market, and now speculation is growing for a potential rate cut in August.
A rate cut would be significant, as lower interest rates typically reduce the cost of borrowing, and some high street lenders have already made mortgage rate cuts, in anticipation of this. Lower interest rates also tend to boost demand for certain equities, as investors seek higher returns in a low yield environment. A further delay could also risk putting the UK economy into a recession.
Here are some reactions from wealth managers to the latest figures.
Isabel Albarran, investment officer at Close Brothers
Asset Management
“While the 2.3 per cent reported is slightly higher than the 2.1
per cent expected by many, it is still the closest we have been
to the Bank of England’s 2 per cent target since July 2021. This
marks a key stage in the UK’s rate cut debate – the question is
no longer whether interest rates will be cut this year, but when
we will see those cuts. With the majority of MPC members voting
to keep rates unchanged in the interest rate decision, this much
softer CPI print will likely go some way in providing the
evidence they need to justify an impending cut. However, greater
stickiness in services inflation makes us expect that the bank
will wait until August, especially after last week’s first
quarter UK GDP data and manufacturing PMI.”
Matthew Rees, head of global bond strategies at Legal &
General Investment Management
“Today’s UK inflation numbers are yet more evidence that services
sector inflation is still running too hot for comfort. On the
back of these numbers, we’ve seen investors rapidly re-assessing
bets on June rate cuts, pushing up UK interest rates and driving
sterling higher. The sticky inflation numbers keep us
comfortable with our low duration (interest rate risk) position.
While inflation remains high, the insurance value of duration is
likely to remain low. We also continue to hold most of our
duration outside of the UK, preferring Australian and US duration
exposures."
Daniel Casali, chief investment strategist at UK wealth
manager Evelyn Partners
“While the inflation data surprised on the upside, the broad
downward trend in inflation is intact. This raises the
possibility that the Bank of England (BoE) could still cut its
base interest rate at its next interest-rate setting meeting in
June, although this is now a tight call. However, before that
meeting there will be one more CPI print to win round a majority
of Monetary Policy Committee members to favour an interest rate
cut. The MPC will also consider that wage growth (albeit slowing)
remains elevated. Nevertheless, it will be encouraging for the
MPC that falling job vacancies point to lower wage rates in
the months ahead. The broader trend of lower inflation should
encourage the BoE to cut interest rates this year. Expectations
of future monetary easing should give some added support to the
economic outlook and stocks.”
Daniele Antonucci, chief investment officer at Quintet
Private Bank (parent of Brown Shipley)
“There’s light and shade in today’s UK inflation figures. Putting
it all together, we think these inflation reports suggest that
the Bank of England is still on course to lower interest rates in
the coming months. The timing, though, remains quite uncertain
and it’s not obvious that the central bank would begin its rate
cutting cycle at mid-year. Should it want extra confirmation that
inflation is truly likely to converge to its target, as we
believe, August looks more likely.
“In addition, the pace of rate reduction remains quite uncertain. This is because inflation looks sticky in the US. In turn, this means that the Bank of England may refrain from cutting too much if the Fed doesn’t for a while longer. If the UK saw lower rates versus the US, the pound sterling would risk depreciating versus the US dollar, as exchange rates tend to be driven by interest rate differentials in the near term. If that happened, then import price inflation would accelerate in the UK, thus putting the achievement of the central bank’s inflation objectives at risk.”
Luke Bartholomew, senior economist
at abrdn
“While inflation continues to fall sharply, this report will come
as a disappointment to the Bank of England and investors looking
for a rate cut in June. In particular the strength of core
inflation and services inflation, both of which came in a fair
bit stronger than expected, will make it harder for the Bank to
feel confident that underlying inflation pressure is cooling
adequately. There is another inflation and labour market report
between now and the Bank’s June meeting which taken together
could change the debate again, and certainly the market is likely
to remain volatile in its assessment of the likely path of
policy. But for now, the case for August over June for the timing
of the first cut is looking stronger today.”
Nick Henshaw, head of intermediary distribution at
Wesleyan
“Almost hitting the government’s 2 per cent inflation target
clearly strengthens the case for the Bank of England to cut the
base rate in June. However, rate setters have repeatedly stated
that they want to see inflation settle at or around the 2 per
cent target before they act, so they may want to wait for more
than one month’s data to confirm that this isn’t just a flash in
the pan. After all, many of the underlying issues that have been
causing market volatility haven’t gone away. Advisors can
mitigate any ongoing sequencing and volatility risk by tailoring
diversified investment portfolios that incorporate specialist
options, such as smoothed funds, for their clients.”
Andy Mielczarek, founder and CEO of SmartSave, a Chetwood
Financial company
"People mustn't be swayed into thinking the economy is back to
normal; caution should be exercised. Prices and core inflation
are still at high levels. The long-lasting effect of a
high-inflation environment cannot be reversed in one fell swoop,
and those who are still battling with expensive household bills
and repayments must continue to be proactive with their finances.
With the 2 per cent target within reach, the Bank of England will
no doubt be considering interest rate cuts in the coming months.
So, people should take advantage of the current positive savings
outlook, explore their options and maximise their returns before
they lose their opportunity."
Nicholas Hyett, investment manager, Wealth
Club
“With inflation back on target, the danger now is that high
interest rates start to suffocate the economy. All eyes will be
on the MPC next month to see whether they will cut interest
rates. That decision isn't made easier by core inflation, which
excludes the effect of global food and energy prices and remains
far higher at 3.9 per cent. Does the central bank cut in June, or
take advantage of the fact that inflation came in a touch higher
than expected and hold off until its August meeting? Movements in
currency markets this morning suggest an August cut just became a
little more likely."
Daniel Austin, CEO and co-founder at ASK Partners, an
independent property lender
“This fall in inflation is significant. It takes us very near to
the Bank of England's target of 2 per cent, which means we might
see an interest-rate cut as early as next month. This potential
rate cut is a crucial development, as lower interest rates
typically reduce the cost of borrowing. In anticipation of this
move, we have already seen major high street lenders
making cuts to mortgage rates. This proactive step will
start making life somewhat easier for borrowers by lowering
monthly payments and reducing overall interest expenses. The
positive ripple effects of this trend are multifaceted. Lower
mortgage rates can stimulate the housing market, as they make
home loans more affordable. This affordability can encourage
first-time buyers and those looking to move to more expensive
properties to take the plunge. With financial pressures easing,
more people will feel encouraged to enter the property market
again, potentially leading to an increase in property sales and a
boost in related industries such as construction and home
improvement.”
Lindsay James, investment strategist at Quilter
Investors
“Investors will cheer the fact that headline inflation has
come back close to target once more. Historic data shows that in
the absence of a recession, investment returns are strongest in
the year after the first rate cut, so there will be lots of
anticipation as the UK appears to turn the economic corner.”
Julian Jessop, economics fellow at the free market think
tank, the Institute of Economic Affairs
“Monetary growth has now settled at rates consistent with low and
stable inflation, and there are plenty of signs that the labour
market is cooling. Energy and food inflation also have further to
fall. Indeed, the first interest rate cut could still come in
June. The MPC will then have another set of inflation and labour
data and more evidence on the latest pay settlements. If not
June, then rates should be cut in August. Any further delay would
risk tipping the economy back into an unnecessary recession."