The Bank of England has cut interest rates from 4.75% to 4.5%, the lowest base rate since June 2023, in a bid to reinvigorate the UK economy.
At its meeting on Thursday, the Monetary Policy Committee voted by a majority of 7-2 to reduce the bank rate by 0.25%. However, in a sign that further cuts could be on the horizon, two members of the MPC preferred to reduce the rate by 0.5% to 4.25%.
Scott Douglas, senior director, head of debt advisory at Centrus, commented: “The UK economy remains stagnant, with private sector employment declining – factors that strengthen the case for less restrictive monetary policy. This economic slowdown is the primary catalyst for the BoE’s decision to lower rates.
“However, inflation remains stubbornly above the 2% target, with little indication that it will return to target levels by year-end, much to the Government’s frustration. Adding to the uncertainty is the potential escalation of Trump’s trade war, and the possibility of it hitting Britain with a retaliatory response from Starmer could further fuel inflationary pressures, complicating the central bank’s path forward.”
The Bank of England said that while domestic inflationary pressures are moderating, they remain somewhat elevated and some indicators have eased more slowly than expected. Higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7% in the third quarter of 2025, even as underlying domestic inflationary pressures are expected to wane further.
Derrick Dunne, CEO of YOU Asset Management, said: “With the UK still above the 2% target, there is a risk that prices could start climbing more quickly than expected if economic activity ticks up. Markets have already priced in the possibility of further cuts this year but February’s inflation bulletin will heavily influence whether these expectations solidify.
“If consumer spending rebounds and business sentiment improves, the MPC may consider further rate cuts. Yet caution is the watchword here while so many unknowns, including geopolitical concerns, continue to cast their shadow.”
Luke Bartholomew, deputy chief economist at abrdn, said: “The decision to cut rates was widely anticipated. But the fact that two MPC members voted to deliver a bumper 50 bps cut, despite revising up near term inflation forecasts, gives a sense of how concerned some policymakers are about the headwinds to growth.
“It is hard to see the Bank of England materially stepping up its pace of easing until it sees how the increase in National Insurance is digested by the economy in the spring. However, the Bank’s signals today suggest there is scope for several more rate cuts this year, given the weak growth outlook, and we continue to see rates below 3% over the next two years.”
What does it mean for annuities?
Annuities rates are closely tied to government bond yields, which can be affected by interest rate changes.
The annuity market has performed well in recent years, with incomes hovering just below all-time highs. The latest data from the Hargreaves Lansdown annuity search engine shows a 65-year old with a £100,000 pension can get up to £7,492 per year from a single level annuity with a five-year guarantee.
While a reduction in the base rate may lead to lower bond yields, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, believes annuities will remain in favour.
“The interest rate cut will likely do little to dampen demand with annuities expected to deliver great value to retirees for some time yet. Once you’ve bought an annuity it can’t be unwound so it’s vital you do your homework before you commit. Using an annuity search engine to look across the market is a great way of making sure you get the best deal and disclosing your health details can also give you an extra income bump.
“If you are worried about tying yourself into an annuity rate now, it’s important to remember you don’t need to commit all of your pension at once. Instead, you can annuitise in stages throughout retirement, securing guaranteed income as your needs change. Adopting a mix and match approach with drawdown can give you a great mix of flexibility and certainty.”
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