• Bank Rate on hold at 5.00% but further cuts expected by end of year
• Bank of England Governor hints on ‘more activist’ stance to rate cuts
• Mortgage approvals pick up in August following ease in mortgage rates
• Savings balances grow strongly in August, as ISAs attract the majority of deposits

Bank Rate remains at 5.00% in September but cuts expected by end of year

1. The Bank Rate remained unchanged at 5.00% in September, with eight members of the MPC voting for no change, and one voting for a 25 basis point cut. With little material development in the outlook for inflation since the previous cut on 1 August, there was little impetus for any further action. In a Speech by the Bank’s Chief Economist Huw Pill, he explains his concerns that structural changes have taken place in the economy meaning the Bank Rate needs to remain in restrictive territory for sufficient to ensure inflation reaches target in a lasting and sustained manner. This could be interpreted at odds with comments made by the Governor just a day earlier in an interview with the Guardian, where he said that the Bank could become ‘a bit more aggressive’ in cutting rates provided the news on inflation continued to be positive.
    
2. And the latest inflation data was relatively static, with headline annual CPI inflation remaining unchanged at 2.2% in the 12 months August. However the Bank are more concerned about ‘CPI services’ as it is more indicative of underlying inflation. This measure increased to 5.6% in August from 5.2% in the 12 months to July, although it has been on a downward trend since May 2023 when it peaked at 7.4%.
    
3. Conditions in the labour market remained relatively stable, but continued to show signs of cooling. The unemployment rate fell to 4.1% in May to July 2024, down from 4.2% in April to June. Job vacancies fell for the 28^th consecutive month to 857,000 in Jun to August, down 42,000 from May to July, however they still remain 8% higher than before the pandemic in March 2020. The economic inactivity rate is down on the quarter from 22.2% to 21.9% but up on the year, and still above pre-pandemic rates. However, regular earnings (excluding bonuses) grew by just 5.1% in the year to July, down from 5.4% in the year to June. This is the lowest since June 2022 at 4.7% and an encouraging sign that inflationary pressures from the labour market are easing.
    
4. The Bank will have one more set of inflation and labour market data, together with a new set of forecasts to hand before the MPC meet on 7 November. They will also have a clearer picture of the government’s fiscal policy to be announced in the Budget on 30 October. Unless there is a surprise in the data or from the government, a reduction in the Bank Rate is highly likely to occur, especially given the Governor’s recent comments.
    
5. The latest data (on 4 October, the day after the Governor’s) shows markets were pricing in around a 50 basis point cut by the end of year, and for Bank Rate to be around 3.83% this time next year.
    

6. The Financial Policy Committee reported in their October meeting that the overall risk outlook was broadly unchanged compared to three months ago. Mortgagors continued to be resilient to higher interest rates, however around a third had not yet refinanced at higher interest rates and some lower income households and renters remain under pressure. The proportion of mortgagors considered to be ‘at risk’, categorised as those spending more than 70% of the cost-of living adjusted disposable income on mortgage payments was expected to remain broadly flat, and well below pre-global financial crisis peaks. The FPC would be publishing an assessment of financial stability risks from AI in the first half of 2025.

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