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Can we expect a rate cut soon?

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

The Bank of England has indicated that it will be prepared to cut rates, if the economy slows further.

Flat inflation lets Bank of England sit on its hands

If you’re on a variable rate mortgage or, like me, coming to the end of a fixed rate deal, take note - financial markets expect rates to be cut to 0.5% in the coming year.

Yesterday the Bank said underlying UK growth had “slowed materially” in 2019, as a result of Brexit uncertainties and a wider global slowdown. 

While the Monetary Policy Committee (MPC) voted to keep rates on hold at 0.75%, two members called for rates to be cut to 0.5% immediately to support growth.

The Bank of England still expects UK economic growth to pick up, assuming an improvement in global growth and an end to the current Brexit-deadlock. However, governor Mark Carney acknowledged that “neither is assured”.

A key rate to watch is inflation. Michael Saunders and Jonathan Haskel, the two external rate-setters who called for the cut, pointed to the current rate of inflation, which at 1.7% is below the Bank’s target of 2% and is expected to fall further next year.

The MPC expects inflation to drop sharply by next spring to around 1.25%, due to planned cuts in regulated energy and water bills.  

Interest rates are traditionally used as a way of controlling inflation. If inflation starts to accelerate rapidly, a rise in interest rates can dampen consumer spending as households have less spare cash to spend at the end of the month. 

Conversely a drop in rates, can act like a tax cut to the UK’s millions of borrowers, especially those on variable rate mortgages, as it costs less to service their debts. 

So, what is the outlook for inflation, looking further into the future?

The Bank still expects inflationary pressures to build after the anticipated drop in the spring, but currently forecasts it will only be slightly above its 2% target even at the end of 2022.

So for now, borrowers can at least take comfort from the fact that inflation appears to be under control. Shame the same can’t be said for some of the other uncertainties investors face, with a general election before Christmas and a Brexit extension until the end of January on the horizon.

January 31st is also an important date for the Bank’s governor Mark Carney as he is due to stand down from his role on that day. However, at the Bank’s news conference this week, he committed to ensuring the handover to the new governor will be as smooth as possible, so has not ruled out another extension to his term. 

Of course, while cash-stretched borrowers might welcome the prospect of a rate cut, it is bad news for the millions of savers who, since the financial crisis, have had to adapt to an environment of lower for longer interest rates.

With the average dividend yield on the FTSE 100 currently at 4.4%, many investors are increasingly looking towards riskier investments, such as stocks and shares, as an alternative to cash, in order to get a regular income.

If this higher-risk, but potentially higher-reward approach makes you feel nervous, it is probably best to put this in the hands of the experts, by investing in a managed fund. Fidelity’s Select 50 offers a number of funds that invest in UK shares with the aim of providing an income and the potential for capital growth. These include the Fidelity Enhanced Income Fund, Franklin UK Equity Income Fund and JO Hambro UK Equity Income Fund.

And on the question of what does Brexit mean for your money? We answer your questions here.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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