Bond Watch: Bank inches closer to rate cuts with three expected in 2024

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.         

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.         

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Rates unchanged but dovish clues 

The Bank of England – as expected – kept interest rates unchanged at 5.25% this week. They have been at that level since last summer. 

However, there were clues that interest rate cuts are coming. The Monetary Policy Committee voted 8–1 to maintain Bank Rate at 5.25%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%. 

This was a big change on last month, where despite leaving rates unchanged, two members of the MPC favoured a rise in interest rates and just one wanted a cut. This shows that the weight of opinion is now that rates should not rise further, and cuts are becoming more likely. Markets expect three interest rate cuts this year.  

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The Bank’s battle against inflation received a boost this week when the annual consumer price index for February came in at 3.4%, lower than the 3.5% expected, and well below the 4% print for January. 

Neil Birrell, chief investment officer at fund group Premier Miton, said: “The UK base rate remains at 5.25% for now, but with the Bank of England remaining positive that inflation will be back to target sooner rather than later, there may be more room for optimism on rate cuts than they are currently suggesting. Clearly the Bank won’t commit to cuts until the data allows it, however, investors may well start looking beyond that now.” 

The market reaction was positive following the Bank’s decision, with the FTSE 100 rising 2.5% over the past two days and bond yields falling.  

No change to US interest rates either 

One day before the Bank of England’s decision, the Federal Reserve in America also chose to leave rates unchanged. But like the UK, it signalled that interest rates cuts were coming and the battle against inflation was gradually being won. 

It indicated rates could fall by 0.75 percentage points this year, down from between 5.25% and 5.5%. It also raised its forecast for economic growth in the US – to 2.1% for this calendar year – and said that inflation would be lower than it previously expected, at 2.4% for the year.  

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The positive outlook from the Federal Reserve sparked a global stock and bond market rally. So far in 2024, the S&P 500 has risen 10.5% in local currency, with global indices shares, which are dominated by US names rising by a similar amount.  

Whitney Watson, co-chief investment officer of fixed income at Goldman Sachs Asset Management, says: “We continue to expect that inflation progress over the past year and disinflationary signals, such as rebalancing in labour, goods and rental markets, will lead the Federal Reserve to begin its cutting cycle this summer.”