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The Bank of England (BoE) recently took the significant decision to lower UK interest rates on 31 July 2024. The Monetary Policy Committee (MPC) chose – narrowly, by 5 votes to 4 – to lower the base rate from 5.25% to 5%.
Naturally, this has important implications for savers and borrowers. Traditional wisdom states that the former suffer when interest rates decline, whilst the latter (e.g. those with mortgages) benefit. However, how has the recent fall affected the economy and, for our readers, expats? Could we see further falls later in the year?
Below, we explore these questions more closely. We hope these insights are useful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu
Why did the base rate fall?
The UK base rate had been stuck stubbornly at 5.25% for the 12 months before the BoE decision in July 2024. The primary reason given by BoE figures over this time, such as Governor Andrew Bailey, was that the price level (inflation) was rising too quickly. Policymakers feared that lowering interest rates would exacerbate the problem, possibly leading to a price-wage spiral.
However, in the 2 months leading up to August 2024, there were encouraging signs that UK inflation was coming under control. In May and June, the Consumer Price Index (CPI) rate was steady at 2% (the BoE’s official target). This gave the MPC confidence that, on balance, the base rate could be lowered slightly by 25 points.
Will interest rates continue to fall?
The markets currently expect the BoE to cut the base rate a further two times before the end of 2024. This is not guaranteed to happen, but it seems reasonable to expect a total fall of 50 points (to 4.5%) over the next 6 months. However, why are the markets so optimistic – especially when the most recent CPI figures for July 2024 rose to 2.2% (above the BoE target)?
It is important to remember that the CPI measure is useful but obscures a lot of key underlying variables in the UK economy. For instance, it does not account for housing costs (which is accounted for in a separate measure, called the CPIH). Here, the picture is more muddled, with the CPIH rising slightly to 3.1% for the 12 months prior to July 2024, compared to 2.8% in June.
There is also the rate of services inflation, which is especially important for the UK (a service-based economy). This is likely where markets and MPC members are focusing a lot of their attention when forecasting interest rate movements for the rest of 2024. In July 2024, the price level for services was 5.2% compared to 5.7% in June. This is lower than the BoE prediction of 5.6%, and confirms a general downward trend from 6.5% in January 2024.
What this means for expats
For British expats without a mortgage, savings, investments or pensions in the UK, the base rate change on 31 July – and future movements – might not be that significant. However, those with these assets back in the homeland (or those looking to acquire them) may be affected.
For instance, should you build your savings in the UK using British pounds (GBP) or in your local country – e.g. an EU member state, using Euros. Where might you achieve a better interest rate? Would you need to eventually convert the currency of your savings to another, and how might that affect your real returns?
Perhaps you are thinking about repatriating to the UK and buying a property. In which case, should you try and time your move so that it coincides favorably with changes to the UK base rate? If you are considering your retirement plan, should you buy an annuity sooner rather than later, to try and lock in a higher income level (annuities are heavily influenced by interest rates)? For investors, should you rebalance your portfolio if newly issued bonds might fall in the UK as the base rate comes down?
These are complex questions. There is no universal set of answers. Rather, you need to carefully consider your own unique financial goals, situation, risk tolerance, investor values and investment horizons – ideally with a financial adviser. Working with a professional will help you build a holistic plan that accounts for these questions, also giving you flexibility if – for some reason – the base rate does not continue to fall in 2024 (remember, the outcome is merely forecasted by markets; not guaranteed).
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu