Strategy

UK Interest Rates Raised To Highest Level Since 2008 – Reactions

Amanda Cheesley Deputy Editor London 4 August 2023

UK Interest Rates Raised To Highest Level Since 2008 – Reactions

After the Bank of England increased interest rates for the fourteenth time in a row in a bid to tackle inflation, investment managers discuss what this will mean for the economy, investments, savings, mortgage holders, as well as the possibility of further rises.

The Bank of England increased interest rates by 0.25 per cent to 5.25 per cent this week, taking the base rate to the highest level since April 2008, to fight inflation which currently stands at 7.9 per cent. The rise was in line with market expectations.

The monetary policy commitee voted six to three in favour of the 0.25 per cent rate rise, with two members preferring a steeper rise to 0.5 per cent and one preferring to leave the rate. The government has pledged that inflation will be 5 per cent or below by the end of the year, but the overall target remains at 2 per cent.

The base rate influences the cost of borrowing, meaning that a rise can lead to more expensive mortgages. But it can be good news for savers, as banks may offer greater returns on savings accounts, Wealth Club said in a statement. Further rate rises haven’t been ruled out, if there is evidence of more persistent inflationary pressures. The Bank’s governor Andrew Bailey said the MPC’s efforts meant that inflation was on course to meet its 2 per cent target.

Here are some reactions to the hike from investment managers.

Nicholas Hyett, investment manager, Wealth Club
“The MPC is sitting on the fence in its minutes. Recent strength in wage growth has clearly got Bailey & Co worried. But there’s also a recognition that the past rate rises are starting to weigh on economic activity, which has led to a slight slowdown in rate rises. But the penultimate line of the summary says it all: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” The Bank is determined to keep its eyes on the monetary road regardless of the noises coming from the back seat.”

Nicolas Sopel, head of macro research and chief strategist, Quintet Private Bank (parent of Brown Shipley)
“The BoE noted some progress on the inflation front, “falling but still too high.” However, the Bank’s projections, which were revised slightly lower for 2023 and 2024, still revealed that inflation will remain above the 2 per cent target and only return to that target by the second quarter of 2025. This underscores the MPC’s view that the Bank rate must remain restrictive for longer. While economic data has turned more mixed and despite slowing growth, we think that the Bank of England will continue to raise the Bank rate in 2023, bringing it to 6 per cent. This is because underlying price pressures remain elevated, driven by strong wage growth. The BoE will likely be the last central bank in developed markets to pause its tightening cycle.”

Mike Stimpson, partner, Saltus
“Our latest Saltus Wealth Index report, published last month, highlighted that nearly nine in 10 of high net worth individuals are worried about rising rates impacting their monthly mortgage payments. The report also revealed that 35 to 44-year-olds are experiencing the biggest pressure on their finances as a result. Nearly 40 per cent said that rising mortgage payments had already placed a strain on their cashflow, whilst 47 per cent said that they expect to feel the pinch in the coming months. Looking further ahead, we expect interest rates to remain high, potentially reaching a peak of 5.75 per cent in the first quarter of 2024. While rate rises have cooled inflation in the last month, they have not had a sufficient impact to have the Bank of England consider bringing the base rate back down."

Jonathan Sparks, chief investment officer – UK and Channel Islands – HSBC Global Private Banking & Wealth
“In contrast to the well-telegraphed decisions from the Fed and European Central Bank last week, the market viewed today’s decision from the Bank of England as highly uncertain. The central bank has taken the more dovish view and raised rates by 25 bps, compared to our expectation of 50 bps, to 5.25 per cent. We therefore expect a further 25 bps from the Bank. Our view was that the market was expecting too many rate hikes by the Bank of England, especially after the recent fall in inflation. Hence our recent call to take profit on our bullish sterling view, and moving to neutral. For the same reason, we are increasingly comfortable with extending gilt duration, to seven to 10 years. Relatively speaking, the BoE has a window of opportunity to avoid being the outlier amongst central bank peers. We think the Fed has finished hiking now and we only expect one more hike from the ECB. Given the cooling off reflected in recent UK inflation readings we don’t see a significant risk of the Bank of England having a longer rate cycle compared to the US and EU, even with this 25 bps hike.”

Charles White Thomson, CEO Saxo UK 
“We should not underestimate the speed and ferocity of such rate moves and the pressure this is applying to the leveraged consumer. The full extent of this has yet to be seen, as with inflation there is lag, including mortgage holders who are rolling off unprecedented super cheap deals. Monetary policy setters, especially in the UK, have a highly difficult conundrum to solve – defeat inflation with the blunt weapon that are interest rates without breaking the economy and consumer. The risk for further policy failure is real and the stakes are getting increasingly high. I would like a full review of our monetary policy, and the performance of the governor and the MPC to be carried out by generalists as well as economists.”

Harry Richards, investment manager, fixed income, Jupiter Asset Management 
“CPI in the UK may have begun to fade from the recent highs, but it remains well above the 2 per cent target that would allow the BOE to declare victory over the inflation battle. Interest rates are starting to bite. House prices are falling at their fastest pace since 2009, broad money growth is stagnant, retail sales are lacklustre, and the UK Manufacturing PMI already stands at recessionary levels which typically leads the services side of the economy. Unfortunately, a growth lifeline from Europe isn’t looking particularly likely either as the data there is worse still and the single currency union makes up over 40 per cent of UK exports. Keep in mind, the phasing of the peak in UK inflation was far later than in most regions of the developed world which results in powerful base effects as we move into the end of the year. This should drive headline inflation materially lower in the next few months. Should the labour market start to soften as we anticipate, a deeper recession lies ahead and that will only act to accelerate the pace of disinflation.”

Douglas Grant, group CEO, Manx Financial Group 
"Today’s rise in interest rates is yet another blow to businesses, amidst the already challenging and delicate balancing act between managing inflation and signalling a recession. Stubbornly high inflation and only small increases in GDP data have highlighted the economic rollercoaster that lies ahead. SMEs must take this as a reminder to review their existing lending structures and ensure they are prepared for further challenges. Many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, but other businesses that were not as forward-thinking face damaging knock-on effects. According to our recent research, 40 per cent of SMEs – compared with 27 per cent last year – have had to stop or pause an area of their business due to a lack of external financing. As the government looks for ways to curb the highest rates of inflation in decades, the significance of implementing a permanent scheme cannot be underestimated. It could be the crucial factor that determines the survival or failure of many companies and, consequently, the overall economy.”

Andy Burgess, fixed income investment specialist, Insight Investment
“The Bank acknowledged that current policy was restrictive and may have to stay that way for a “sufficiently long” period. Indeed, as we near the peak in rates, the focus may start to shift from how high rates go to how long they will stay there. The risk of recession remains ‘significant’, although strong pay growth and elevated levels of service inflation suggest that “persistent inflationary pressures may have begun to crystallise. In our view, however, headline inflation is likely to continue to slow from here, not least due to base effects and energy prices continuing to fall. The Bank remains data-dependent, with inflation data released in the months ahead critical to how high rates ultimately go.”

Jamie Niven, senior fund manager, Candriam
“Our takeaway is that the MPC favours a cautious approach to further hikes and gives the impression that the current restrictive rates are close to the peak it foresees. However, it would have been dangerous to communicate this alone given its potential impact on financial conditions, and it therefore prefers to imply higher rates for longer, as opposed to a higher terminal rate followed by cuts. It is our belief that the current restrictive levels will cause a larger growth impact, eventually resulting in lower policy rates than currently implied by market expectations.”

Julian Jessop, economics fellow at the free market Institute of Economic Affairs
“The Bank’s decision to raise rates again, albeit by just a quarter point, suggests that the MPC is still looking in the rear view mirror. Money and credit growth have already slowed sharply and other leading indicators of inflation have weakened, including commodity prices and evidence from business surveys. It would have made more sense to pause to assess the impact of the large increases in rates that have already taken place, as other central banks have done. The UK economy is like a frog slowly being cooked by ever higher interest rates. By raising the temperature further now, the Bank risks doing too much and, once again, only realising its mistake when it is too late.”

Jeremy Leach, CEO, Managing Partners Group
“One has to consider whether the decision by the Bank of England to make its base rate 21 times higher than it was 18 months ago will have much of an impact on the global price of goods and services when the population of the UK is 0.85 per cent of the global population. This financial pressure of pushing interest rates so high in such a short period of time has had a crippling impact forcing many people into poverty or financial hardship. It has been the cause for discontent over salary levels that have led to industrial action at a point when governments have lower financial resources as the cost of servicing the existing debt has risen and most of this is as a result of higher interest rates. Whilst inflation has been beneficial in as much that the real value of that debt has fallen the increases in interest rates make the cost of servicing that debt much more expensive.”

L&C Mortgages 
"The past few weeks have seen the rising mortgage payments and high-interest rates make front page news, with these increases pressuring the finances of millions of borrowers in Britain, triggering a surge of uncertainty about where interest rates will go next. However, the latest news has now caused a surge of online interest in those looking to get more information and help on mortgages, interest rates and rent, highlighting the massive impact of the cost-of-living crisis on the British public. There are still plenty of deals available for borrowers looking to switch, but remortgaging a home is a decision that should be made with thorough research and help. Some tips to keep in mind during these uncertain times would be to shop around for the best rates available, which can be done online or by using a mortgage broker. Or look to request to extend the term on your mortgage so that you can pay a smaller amount each month but for a longer period. Another option could be to switch to interest-only temporarily; this can reduce the monthly amount of your payments in times of need and financial difficulty. Lastly, if you are struggling for tailored support, talk to your lender to help find the best solution.” 

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