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Central bank rate cuts ahead – we look for the Bank of England (BoE) to lower rates from 5.0% to 3.75% by the end of 2025, while the US Federal Reserve cuts from 5.5% to 4.25%, and the European Central Bank eases from 3.75% to 2.75%.
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Companies to benefit – in this note we highlight the main beneficiaries. For consistency and ease of comparison, we are assuming a 100bp reduction for FY25 vs FY24, and a further 50bp reduction in FY26.
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Accounting for fixed rates – our numbers incorporate where companies have fixed rates, which accounts for the larger reductions in FY26.
This note highlights the companies in our coverage that will have a tailwind from lower finance costs in a falling rate environment.
End of the low rate era. Four decades of gradually declining global interest rates, which culminated with UK rates reaching near-zero levels after the 2008 Global Financial Crisis (GFC), ended in 2021 when a confluence of short-term shocks caused inflation to surge. The Bank of England responded by tightening monetary policy aggressively. Policymakers raised the bank rate from 0.1% in December 2021 to 5.25% in August 2023.
BoE shifts towards a neutral stance. Although the worst of the inflation shock is over, the BoE will only cautiously normalise its monetary policy. Tight labour markets and healthy recovery momentum could trigger renewed inflation pressures if the BoE cuts interest rates too much or too quickly. After lowering the bank rate by 25bp to 5.0% at its August meeting, we expect the bank to cut by another 25bp in November to take the bank rate to 4.75% by year-end. We look for four more 25bp cuts in 2025, reducing the bank rate to 3.75% by end-2025. We look for the BoE to keep the bank rate unchanged in 2026 at 3.75%.
Sector impacts. We show the companies in each sector that we believe will benefit from lower rates. Of course, this does not happen in a vacuum and there will be plenty of other drivers (eg currency). Sectors that are likely to see most benefit will be housebuilding and real estate, which should see long-term benefit from increased demand and affordability. We also look at the alternatives space in investment trusts, where there are a number of companies that will benefit.
UK interest rates – back to normal
Four decades of gradually declining global interest rates, which culminated in near-zero UK rates after the 2008 GFC, ended in 2021. While short-term shocks may have triggered the initial rise in UK interest rates, long-term structural and global factors are likely to prevent them from falling back to their post-GFC lows.
A sudden end to rock-bottom rates
Figure 1 shows the BoE bank rate and 10-year bond yields chasing inflation higher in 2021. The sudden price pressures were the result of an enormous imbalance between demand and supply caused by excessive policy stimulus and unexpected supply shocks.
On the demand side, massive Covid-19-related fiscal and monetary stimuli in 2020 and 2021 lifted spending power above its sustainable rate. On the supply side, global Covid-19 lockdowns in 2020 and 2021 caused dislocations in global shipping, manufacturing, and trade before the Russian invasion of Ukraine disrupted the supply of gas to Europe in 2022.
BoE policy outlook – gradual rate cuts ahead
As the short-run imbalances that caused inflation to surge in 2021-23 fade, the BoE can gradually take steps to turn its monetary policy from tight to neutral. After lowering the bank rate by 25bp to 5.0% at its August meeting, we expect the bank to cut by another 25bp at its November meeting to take the bank rate to 4.75% by year-end. The risks for this year are skewed towards one additional cut at the final meeting of the year in December. We look for four more 25bp cuts in 2025, reducing the bank rate to 3.75% by end-2025. We look for the BoE to keep the bank rate unchanged in 2026 at 3.75%.
What is normal anyway?
Our best guess is that a neutral BoE bank rate is around 3.50-3.75%. On a rule-of-thumb basis, this is the BoE’s 2% inflation target plus UK potential growth, which we judge is around 1.5-1.7% YoY.
Less tight monetary policy can lift household spending by encouraging more consumer credit and less saving, support housing market activity, and reduce the cost of capital for businesses, which can help underpin investment growth. However, this is not a normal cutting cycle which usually comes in response to a recession. Instead, the BoE is reducing its policy rate towards the level that is consistent with normal economic conditions.
Note that interest rates have remained elevated even as inflation has faded and, as Figure 2 shows, that a large part of the rise in long-run nominal rates appears to be due to higher real rates, signalling a non-inflationary component.
Figure 1: UK inflation and key interest rates inc. Peel Hunt forecasts
In %. Shaded area shows Peel Hunt forecasts. Inflation based on consumer price index. Monthly data. Sources: ONS, BoE, Peel Hunt
Figure 2: Long-run bond yields in nominal and real terms
In %. Monthly data. Source: Bank of England
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