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Interest rates held steady amidst economic concerns

Interest rates held steady amidst economic concerns

14 Dec 2023

As expected, the Bank of England has held the Bank rate at 5.25% for the third consecutive Committee meeting, following the previous CPI inflation release showing inflation falling below 5% for the first time since October 2021.

Sharp price rises observed in early 2023 will take some time to work their way out of the 12 month inflation calculation. This means that getting back to the Bank’s 2% target will take some time, irrespective of the success of the MPC’s policy decisions. Any inflationary falls ahead of expectations would add fuel to speculation around possible interest rate cuts earlier in 2024.

Simeon Willis, Chief Investment Officer at XPS Pensions Group, commented: “Whilst the Bank has again held interest rates at 5.25%, pension schemes will be interested in the market reaction to this and, in particular, whether any rate cuts could be more imminent than previously expected. Whilst gilt yields have closely tracked the increase in the Bank rate over the past year, the potential for gilt yields to fall from here is substantial.

The PPF’s “Purple Book” published last week estimated that aggregated UK defined benefit buyout surpluses stood at c.£150bn as of 31 March 2023. Schemes will be particularly keen to ensure that any knock-on impacts to long-term interest rates do not materially worsen the positive funding levels they’ve built up over the last couple of years.

Going into the new year, schemes may view now as a good time to review the appropriateness of their investment strategies and to ensure they are suitably protected against any potential adverse market movements. This will be particularly important for schemes where buyout is a realistic short-to-medium-term objective.”

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