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."