Mortgage experts think a rate cut is less likely on Thursday after Chancellor Rachel Reeves announced public sector pay rises.
Chancellor Rachel Reeves (Crown Copyright)
In her speech to the House of Commons on Monday, Reeves confirmed that most NHS workers, teachers and members of the armed forces would receive above-inflation pay rises, as would police and civil servants.
While these increases have been welcomed, financial experts say they are also likely to affect the way decision-makers at the Bank of England vote when they meet to decide whether interest rates should be maintained, reduced or increased.
Danni Hewson, head of financial analysis at AJ Bell, said: “It is not surprising that one of the first steps of the new Labor government has been to ensure that industrial relations with public sector workers are put back on a more secure footing by accepting recommendations on the public sector. pay.
“While failure to secure a satisfactory pay agreement would undoubtedly have costly consequences, finding the money to cover the additional costs of meeting the recommendations presents its own challenges.
“The prospect of higher-than-expected pay rises is likely to play a role in the interest rate decisions taken by the Bank of England’s MPC both this week and in the coming months.”
The Monetary Policy Committee (MPC) is the nine-member group within the Bank of England (BoE) that meets every six weeks to decide what will happen to the interest.
For almost a year, the MPC has kept interest rates at 5.25% in an attempt to keep inflation under control. With inflation remaining at 2% for two months – the BoE’s target – expectations of a key rate cut had increased.
But most experts now say there is a 50/50 chance that a cut will go through.
Andrew Montlake, chief executive of Coreco, said via the Newspage Agency: “The chances of a rate cut this week were already on slim margins, but the Chancellor’s latest statement and public sector rewards could well ensure that the Bank of England will stay their hand further.
“While the pay rises are justified in themselves, there is no doubt that they can be seen as inflationary and the kind of data that hits an already cautious Bank of England.”
When will the interest rate be reduced?
If Thursday isn’t the day for rate cuts, when – if at all – could we see a much-needed cut in the base rate in 2024?
Laith Khalaf, head of investment analysis at AJ Bell, said that even if it happens quickly, the effect may not be as impactful as people expect. “This week’s interest rate decision is on a razor’s edge,” he said.
“Markets are currently pricing in a 60% chance of a rate cut, indicating a divided mood among investors on whether the Bank is likely to take action. The market is more confident that we will get a rate cut by the September meeting, and is almost certain that we will get two rate cuts by the end of the year, Refinitiv data shows.”
He added: “The Bank’s interest rate decision is more symbolic than substantive. An interest rate cut marks the start of a new phase of interest rate policy, but at street level the reality is that financial conditions will not change much.
“Especially for the large group of people who get away cheaply fixed-rate mortgages this year and facing a new and invigorating financial reality.”