The International Monetary Fund (IMF) gave the UK economy a positive endorsement, suggesting that the Bank of England could have the scope to cut interest rates up to three times this year.
It said: “Monetary policy has reached an inflection point and the Monetary Policy Committee (MPC) has appropriately shifted to neutral forward guidance since February.
“With Bank Rate more than 2 ppts. higher than staff’s estimate of the neutral rate, the next phase of monetary policy is to ease, and the question is when and how fast to cut rates.
“In this context, the MPC has highlighted the need to see through regulated energy price base effects and wait for clearer signs of receding inflation persistence to guard against the risk of premature easing.
“At the same time, there is a risk of delayed easing. Keeping Bank Rate constant as inflation and inflation expectations fall would raise ex-post real rates, which could stall or even reverse the recovery, and lead to an extended undershooting of the inflation target.
“Staff’s recommendation of about 50-75 bps cuts in 2024 is aimed at balancing these risks.
“Monetary policy should, of course, continue to closely monitor and be informed by incoming data, especially on inflation and the labor market in the next few weeks, as well as the outlook on risks, and adjust as needed.
“In this context, the MPC’s current ‘meeting-by-meeting’ approach, including to evaluate the accumulation of evidence on persistent inflationary pressure, is appropriate.
“Moreover, possible divergence from the US Fed’s rate path will place a premium on effective MPC communication with markets.
“Staff sees merit in a press conference after each MPC decision, akin to the approach taken by other major central banks.”
Newspage asked brokers what this could mean for borrowers and the property market, and how lenders could react, as it could signal that the first cut may come in June and doesn’t rule out further reductions before the year is out.
Reaction:
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial:
“The Bank of England have cloth ears, and don’t hear any outside advice, no matter the provenance.
“Andrew Bailey and his merry men react to data that is only historic and take no account of predictions.
“This typically leads to the UK being the slowest and least dynamic to react to global economic trends, no matter how obvious.
“Despite the pleading from the IMF, the Bank of England will cut once this year and it won’t be until the summer is over.”
Justin Moy, managing director at EHF Mortgages:
“The comments from the IMF around interest rates are hugely significant and open the way for much lower mortgage rates over the coming months. Lenders will be taking note.
“The recommended cut of up to 0.75% in mortgage rates will mean around £3,000 less interest costs on an average £200,000 mortgage over the next 2 years, which should give many borrowers some solid respite financially.
“Separately, in what feels like a complete U-turn by the IMF, we go from one of the worst to potentially the best European countries for growth over the next six years.”
Craig Fish, director at Lodestone Mortgages & Protection:
“This IMF growth forecast is very positive news and suggests that a cut in June is now more likely.
“The suggestion that there may be more than 2 cuts also backs up Andrew Bailey’s comments in the wake of the last MPC meeting.
“Let’s hope that the decision-makers take off their blinkers and see the bigger picture.
“Any delay in reducing rates could inhibit the recovery and pile further unnecessary pressure on households. The ball is now firmly in the Bank of England’s court.”
Ben Perks, managing director at Orchard Financial Advisers:
“This latest report places insurmountable pressure on the Monetary Policy Committee to drop the base rate, and quite substantially too.
“If the Bank of England react, we could experience a ‘soft landing’, but failure to do so will result in more of a ‘hard splat’ for households and businesses alike, which is something we’re all keen to avoid.
“It couldn’t be clearer: reduce now or risk reversing the recovery of the nation.”
Stephen Perkins, managing director at Yellow Brick Mortgages:
“This positive forecast further tips the scales towards the probability of the first base rate reduction in June and could see lenders pre-empt such a cut with some reductions to fixed rates.
“That in turn will benefit the property market and could set us up for a much more positive second half.
“The IMF have just given UK borrowers a significant boost.”
Riz Malik, director at R3 Mortgages:
“The backward Bank of England is as unlikely to pay attention to the IMF as they are to the report Ben Bernanke recently published on their forecasting methods.
“The Monetary Policy Committee might be limiting their comments to hide the fact that they do not understand what is happening in the real world.”
Ranald Mitchell, director at Charwin Private Clients:
“The IMF’s commentary suggests a positive outlook for the UK mortgage market. Their recommendation of a 50-75 basis points cut in interest rates in 2024 aims to balance economic risks, potentially leading to lower mortgage rates.
“The MPC’s ‘meeting-by-meeting’ approach to monitoring inflation and the labour market ensures timely adjustments, while regular press conferences following MPC decisions will enhance transparency and market confidence.
“This is encouraging news for the mortgage market.
“Potential rate cuts between now and the end of 2024 could lower mortgage rates, benefiting homeowners and buyers.
“A first rate cut could occur as soon as June, with more possible in the third and fourth quarters.
“These anticipated rate cuts offer significant benefits to borrowers, promoting affordability and stimulating market activity. A result all round.”
Michelle Lawson, director at Lawson Financial:
“Ahead of tomorrow’s inflation announcement, this is finally a beacon of hope for UK businesses and the country’s beleaguered borrowers.
“The Bank of England just need to execute it rather than languish behind the curve.”
Elliott Benson, owner at Sett Mortgages:
“A positive endorsement from the IMF? Are they feeling OK?”
