Interest rates hold at 3.75% – industry reaction

The Bank of England has held interest rates at 3.75% after a deal between the US and Iran pushed oil prices down and reduced inflationary risks to the UK economy. The Monetary Policy Committee voted seven to two to leave rates unchanged, with chief economist Huw Pill and external member Megan Greene dissenting. They called for a quarter-point increase to offset the risk of still-elevated energy prices feeding into prices.

Commenting on the announcement, Mike Randall, CEO at Simply Asset Finance, said “Most business owners are focused on building for the future – not trying to second-guess inflation forecasts or the next move from the Bank of England. But holding rates will give some encouragement to those businesses looking to invest in their future.
“The key factor determining growth is simple – access to flexible funding. Opportunities don’t stop appearing just because the economic outlook is uncertain, and businesses shouldn’t have to put progress on hold while they wait for conditions to become perfect.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “I think even with the surprise news on inflation yesterday, this was always the most likely outcome. We shouldn’t be disappointed though, particularly with more hawkish members of the MPC calling for hikes. That threat does appear to be dissipating, but it’s certainly not gone for good. Even with the signing of an initial peace deal that intends to end the war, the impact of the Middle East conflict is still likely to feed through in the coming months – members will be conscious of this. I’d argue though that we also need to consider economic growth which wouldn’t be helped by any future increases in rates.

“Even with this backdrop, we have been seeing positive movements in the mortgage market and some increasing competition. The overriding message that brokers need to be sharing with clients is that there is still plenty of money out there and lenders that are willing to lend. Rate changes are coming with tweaks to products and criteria as lenders hit the halfway point of the year and look ahead to their end of year targets. Depending on where they are, lenders are having to be a bit more brave and bold in their appetite to risk and in their pricing to make sure they end the year where they want to be. This is good news for potential borrowers and all the more reason why they should rely on quality advice.”

Neil Rudge, Chief Banking Officer at Shawbrook, said “Today’s decision by the Monetary Policy Committee to hold rates will come as little surprise to businesses. Despite inflation holding steady at 2.8% and some stabilisation in the global economic picture shifting market sentiment in recent weeks, a hold was anticipated and will be a welcome outcome for most firms. Attention will now turn to what comes next, with businesses keen to understand whether rates will begin to fall, remain on hold for longer, or face renewed upward pressure.

“The priority now is planning with purpose. The second half of the year brings both challenges and opportunities, and having the right funding in place to act decisively will be as important as ever. Today’s decision provides a degree of stability to plan around, and firms that use that time well will be better placed for what comes next.”

Charles Resnick, Chief Finance Officer, Afin Bank, said “No surprise that the Base Rate was held today, but it’s a case of rate cuts remaining delayed rather than being cancelled as the Bank of England waits for evidence that inflation is easing.

“Yesterday’s news that CPI was holding steady at 2.8% was a surprise, so that has helped reduce near-term pressure to increase the Base Rate. However, inflation is still expected to rise over the summer as the Ofgem price cap increases.

“With lower oil and gas prices pointing to a less severe peak, the question is how much of that energy shock will feed into prices and wages. The Bank of England’s Monetary Policy Committee will look for a clearer indication that second-round effects are contained.

“Lenders are likely to remain cautious, with higher funding costs, subdued housing demand and elevated macro uncertainty limiting scope for repricing, but policy uncertainty should keep swap rates and lender pricing disciplined.

“For savers, fixed-term deposit prices continue to be significantly higher than the Base Rate, providing an opportunity for customers looking to put their cash away for a while.”

Anna Leach, Chief Economist at the Institute of Directors, said “The MPC were expected to vote for a hold today, but a further member – Megan Greene – joined with Huw Pill to propose a rate rise.

“Higher levels of concern amongst the MPC over the inflation outlook may seem counterintuitive, as inflation came in below Bank of England expectations in May and oil prices have fallen to their lowest levels since March amidst peace deal hopes. But their positioning highlights the reality that even the reopening of the Strait of Hormuz and a future resumption of production will not prevent the unprecedented shock to global oil supplies from taking its toll.

“The Iran conflict will have a lasting effect on inflation and financing costs for both businesses and households. Growth is expected to be lower in the short-term and the labour market remains weak. The Bank is right to keep a firm eye on inflation pressures to avoid the risk of acting too late again, but must balance that carefully against a slowing economy. With monetary policy constrained, the need for government policy to improve the environment for growth is greater. A key priority must be to address the UK’s vulnerability to future energy shocks through a pragmatic approach to net zero transition that better controls near-term costs for businesses and households.”

Suren Thiru, ICAEW Chief Economist, said “These figures point to a jobs market struggling under the strain of soaring energy bills and employment costs, with more firms limiting hiring and holding down pay, especially for younger workers.

“Weak wage growth offers a silver lining for rate-setters by raising hopes that any inflationary spillover from the Iran war will be limited, especially as rising unemployment will help keep pay settlements heading downwards.

“This fresh fall in job vacancies suggests that demand for workers is dwindling uncomfortably quickly amid the growing financial squeeze on firms and as greater automation reshapes the jobs market.

“While the US–Iran peace deal has halted hostilities, the damage to the UK’s labour market is already done, with hiring intentions — already weakened by soaring staffing costs — likely to fade further as higher energy bills bite, lifting unemployment towards 6%.

“These figures seal the deal on a midday interest rate hold by reassuring rate setters that a softening labour market can help keep this Iran-driven inflation shock short lived by dampening demand across the economy.

“The Monetary Policy Committee’s vote split and minutes could tilt marginally more dovish, reflecting policymakers’ likely view that the US–Iran peace agreement could improve the likelihood of inflation slowing without additional policy action.”