July 2024 monthly update

Read our July monthly update – a roundup of the latest financial news and economic headlines.

Bank of England issues first rate cut since 2020

For the first time in over four years, the Bank of England (BoE) voted to cut interest rates to 5% in a move that backed the Labour government’s promise to kick-start growth. The cut was approved by one vote as the Monetary Policy Committee (MPC) were split five to four. The decision came after inflation finally lowered to the BoE’s 2% target in May. This figure stayed in place during June despite stubbornly high services inflation.[1]

Since the rate cut, British shares added to the recent gains after underperforming since the 2016 Brexit vote. The FTSE 250 index of medium-sized firms hit its highest since February 2022 though they fell later in the day due to worries over the US economy.[2]

Now, investors predict that the BoE will make one or two further reductions in borrowing costs before 2025. As such, two-year bond yields (which track investors’ interest rate expectations) dropped by 0.12% to 3.69%. This is their lowest level in over a year. Furthermore, the pound sterling fell to a four-week low of $1.2772 which is down 0.6% against the dollar.[3]

While the pace of growth has been slow when compared to historical figures (at 1%/year between 2024 and 2026), BoE Chief Economist Huw Pill welcomed the improved outlook. This is although he voted to keep the rates at their 16-year high of 5.25%.[4]

“That sort of rate […] that’s better than what we’ve seen,” Pill commented. “But at the same time, I think it’s fair to say it’s not something that we should get too complacent or enthusiastic about.”[5]

BoE rate cut to greatly benefit homeowners

In response to the turnaround in the BoE’s attitude towards rate cuts, mortgage lenders have begun lowering their rates as well. CNBC reported that this could be a sign that financial pressure on households may be easing.[6]

Large listed property builders, such has Persimmon, already rose in value this year due to anticipated rate cuts. This will make mortgages more affordable for consumers and lowers debt costs for companies. Also, the lowered inflation rates and improvements to the economy have boosted prospects for the housing sector. Recent surveys have even shown a recovery in prices.[7]

Nationwide, Santander, and HSBC are among the major high street names who cut borrowing costs by 25 basis points following the announcement. Those on tracker mortgages will be the first to benefit because they follow the BoE’s base rate. Meanwhile, those on standard variable rates are expected to benefit in due course. From September, Santander will reduce its SVR from 7.50% to 7.25%; Lloyds will do the same from 7.25% to 7%; and Halifax from 8.74% to 8.49%.[8]

Andrew Bailey, Governor of the BoE, has implied that rates will come down, but they will do so slowly. Despite this, many brokers expect mortgage rates to continue to fall with some predicting rates as low as 3.5% by early 2025. It should be noted that this will only apply to those with the highest deposits and equity. Recently, Nationwide launched a five-year fixed rate for buyers with a 40% deposit with a £1,499 fee at 3.99%, down by 0.19 percentage points.[9]

“Rates have already been edging down with small but frequent cuts helping to nudge five-year deals close to and even under 4 per cent,” stated David Hollingworth of L&C Mortgages. “[The] decision to cut a little sooner than many had previously anticipated should only help to add further weight to those reductions. We can therefore expect to see further pricing improvements in fixed rates, as lenders continue to fight hard to gain a share in a very competitive market.”[10]

OBR to be given powers to prevent another ‘Mini Budget’ fiasco

In mid-July, Chancellor of the Exchequer Rachel Reeves unveiled the Budget Responsibility Bill. Its aim is to prevent a repeat of former Prime Minister Liz Truss’ ‘Mini Budget’. To facilitate this, the Office for Budget Responsibility (OBR) will be given more powers to scrutinise government announcements on spending and taxation.[11]

With the Mini Budget, Truss’ administration ignored warnings from the fiscal watchdog and announced £45bn in unfunded tax cats in 2022. The move frightened financial markets and led to mortgage rates skyrocketing. The new Labour government hopes that the addition of new oversight will build confidence among investors once more.[12]

If ratified, the law will allow the OBR to make an assessment on announcements which make permanent tax or spending commitments worth more than 1% of the British economy (approximately £30bn). Should Westminster declare significant economic measures without asking for an OBR forecast, a “fiscal lock would be triggered”. Therefore, the OBR, at its own discretion, would be able to decide to produce a forecast on such plans.[13]

It should be noted, however, that the legislation does not apply to emergency or temporary measures lasting less than two years. An example would the government’s response to the COVID-19 pandemic. Furthermore, the proposed terms set a high bar before the OBR can intervene. The peak annual value of former Chancellor Jeremy Hunt’s 2024 Spring Budget was less than half the minimum detailed in the bill.[14]

“This government’s defining mission is to deliver economic growth,” said Reeves. “However, growth can only come through economic stability and a commitment to sound public money.”[15]