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Is a January interest rate cut on the cards?

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

A cut in interest rates could be on the cards as early as this month, judging by the latest economic data and the reaction of sterling on the world’s currency markets.

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Figures released just today show that over the three months to November, the economy grew only 0.1% and just 0.9% in the year to November; that is the weakest annual growth the UK has seen for eight years.

With signs that the economy is in the doldrums, the pound has also started the week below $1.30, leaving it more than 2% lower since the start of the year and on track to fall for the fifth trading day in a row. Today’s fall, prompted by new data that shows the UK economy contracted by 0.3% in November, will undoubtedly put pressure on the Bank of England to cut interest rates.

At the latest monetary policy committee meeting in December, members voted 7-2 against cutting rates, with markets then widely anticipating a rate cut by August of this year. However, that appears to have all changed. UK government bonds have also rallied on the prospect of lower interest rates. The yield on the 10-year gilt has today fallen to 0.74%. It was more than 0.8% last week.

The weakness of the pound had already been driven lower by comments from Mark Carney, the outgoing governor of the Bank of England, last week, after he suggested that interest rates in the UK could stay lower for longer.

The Bank of England governor said that there could be a “relatively prompt response” if it looked like weakness in the economy would persist. He also raised the prospect of more quantitative easing (QE) - last seen in August 2016 with the bank’s £60 billion stimulus package, which saw it pumping more money into the economy by buying government bonds, in order to stimulate the economy.

Mr Carney said there was room to "at least double" the £60 billion pumped in the last time around. His comments immediately pushed sterling to its lowest level against the dollar for nearly two weeks. The sense in the market being that the Bank would not hesitate to cut interest rates, if need be.

At the end of last week, sterling fell by 0.5% to $1.3028; its lowest level since 27 December. Today the pound is lower still, having fallen below the $1.30 level to $1.298 in mid-morning trading.

There is no doubt that the economic outlook for the UK remains gloomy. The festive trading figures for the UK’s beleaguered retailers proved that, with evidence that the supermarket chains had had a poor Christmas and new year and even erstwhile retail stalwarts like John Lewis talking of chill winds that now leave its coveted annual bonus paid to its valued “partners” in jeopardy.

Lower for longer has long been the mantra and become the thorn in the side of income seekers and anyone living on a fixed income. Now it seems, lower still for longer may be about to hit these investors even harder.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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