What Might Hold Up UK Rate Cuts This Summer?

Alan Kinnaird, Business Development Manager at Walker Crips Investment Management comments that the G7 economies will likely follow suit in Switzerland’s rate cut decision if inflation doesn’t spike off the back of oil price increases. Plus, two investment picks worth watching.

“The last few weeks have been somewhat confusing for investors following the Swiss National Bank’s unexpected decision to cut its base rate from 1.75% to 1.50%. The rate cut received a lot of attention in Europe as a consensus emerged among commentators that the Swiss may have fired the starting gun on interest rate cuts.

“Many are now hoping there will be rate cuts across the US, Europe and the UK, with some starting possibly in June of this year. It hasn’t just been the Swiss cutting interest rates early either. There were five official interest rate cuts across emerging markets in March of this year. (See chart below)

“While inflation is clearly on a downward trend within the G7, the Federal Reserve and Bank of England have clearly indicated that rates will only be cut if the economic data supports such a move. The current political risk in the Middle East could easily spill over again into major trading routes including the Red Sea, sending oil prices higher and creating a knock-on effect.

“One of the key factors for the Fed and the BoE will be whether they can afford to cut rates this summer, given the simmering tensions in the Middle East. The oil price will be the deciding factor as any sustained rise can quickly lead to higher inflation across all product categories.

“In the current environment, there are two investment picks worth considering. The first is UK Treasury 0.125% 30/01/2026; this UK Government-backed bond can be bought below its redemption value of £100 (currently £92.98) and held to redemption at £100 in around 18 months. The resulting capital gain of £7.02 is free of capital gains tax for an individual and these offer a relatively low risk when compared to equities.

“Individuals that pay income tax at the ‘higher rate’ and/or ‘additional higher rate’ on their income can still generate a relatively high tax-free return from short-dated UK Government Bonds (Gilts). This is simply due to the fact certain UK Gilts can be bought below their redemption value of £100 and, when held to redemption, there is a tax-free capital gain available for an individual.

“The other investment is SPDR S&P Dividend Aristocrats ETF, currently valued at $128.48 - this tracks a yield-weighted index of dividend-paying companies from the S&P 500 Composite Index, which have increased dividends for at least twenty consecutive years. When looking at the performance of this ETF, it is important to do so on a total return basis (income and capital growth). The dividend element is an important part of its overall return strategy.

“While some of the constituents are fairly mature US companies, the fact that each company has paid a rising dividend for twenty-plus years certainly results in an appealing basket of shares.”