After the Bank of England raised interest rates, and policymakers try to contain the energy shock from shocks to energy markets, wealth managers comment.

The Bank of England raised interest rates yesterday by 0.25 percentage points to 4 per cent in a bid to curb inflation at 3.5 per cent. Financial markets are still pricing in three more rate hikes by the end of next year, but there are doubts about whether this is too aggressive, given the prospect of slower economic growth.

"A hike was widely expected, so it hasn't set off fireworks on financial markets, but it will give borrowers a shiver as budgets become stretched in the year ahead,” Susannah Streeter, chief investment strategist at Wealth Club,” said. “Policymakers were unanimous in their plot to raise rates, which may strengthen expectations of further hikes to come.”

“The cold reality of an era of higher interest rates is hitting home, with three further rate hikes being priced in by financial markets. The conflict in the Middle East has had deep repercussions, and policymakers are anxious about higher energy costs being passed on to consumers and becoming embedded in the economy,” Streeter continued. “So they are trying to dampen down demand by making borrowing more expensive. This is set to act as a drag on spending and investment, make employers more reticent about taking on additional staff, and keep wage growth in check.”

"The risks are mounting. Energy prices have continued to grind higher, meaning inflation is likely to peak later and higher than previously expected, at around 4.5 per cent next summer,” David Rees, chief economist at Schroders added. “The key question is whether this imported inflation shock remains contained, or will it start to feed into domestic wages and services prices. If the recent improvement in labour-market data continues, the Bank may be forced to act."

“We would be cautious about interpreting today’s decision as the beginning of a prolonged hiking cycle. The energy shock is lifting headline inflation, but there remains relatively limited evidence that it is becoming embedded in broader wages and prices. At the same time, higher energy bills, elevated mortgage rates and tighter financial conditions are increasingly weighing on household purchasing power and should ultimately slow demand,” Daniel Siluk, head of Global Short Duration & Liquidity at Janus Henderson Investors, said.

“Our view is that the Bank is effectively buying some insurance against second-round inflation effects and protecting its inflation-fighting credibility. One further increase looks increasingly plausible, but the bigger question for markets is whether the considerably longer tightening cycle currently reflected in the curve will ultimately be delivered. That leaves us relatively constructive on UK duration further out the curve, even if the near-term policy risks remain skewed towards additional tightening.”

“Higher energy prices have pushed up inflation and bond yields, yet growth, consumer spending and the labour market have remained resilient. The economy has given the Bank both a reason to hike and the room to do it,” Isabel Albarran, investment officer at TrinityBridge, said.

“The bigger question is what comes next. Futures are pricing significantly more tightening than most economists expect, even as higher bond yields are already doing some of the Bank’s work. If energy prices fall back before February, today’s move could be ‘one and done’. But if the conflict with Iran keeps oil prices elevated into 2027, the case for a second hike will become much harder to ignore.”

“With inflation already at 3.5 per cent and set to rise further, policymakers are signalling that the inflationary risks from the energy shock can no longer simply be looked through,” Daniele Antonucci, head of investment and chief strategist at Quintet Private Bank (parent of Brown Shipley), said. “For now, this looks more like a risk-management hike than the start of an aggressive tightening cycle. The Bank is acting now to reduce the risk that higher energy costs feed into wages, services prices and inflation expectations. The immediate combination of higher energy prices, above-target inflation and tighter monetary policy is challenging for gilts and interest-rate-sensitive sectors. For sterling, what matters from here is whether the Bank ultimately needs to tighten much more than other major central banks, an unlikely scenario at this stage.

“We think it probable that market pricing for a further three hikes might overstate the case for further tightening, especially given energy market strains have eased a little since Tuesday and the US midterm results,” Felix Feather, economist, at Aberdeen, said. “But we do see at least one further hike, probably coming in February next year. That relatively shallow tightening cycle could leave some space for UK assets including gilts to rally. However, a return to US strikes against Iran or a rise in domestic political uncertainty poses downside risk to this view.”

“For portfolios, the rise in yields continues to leave gilts looking attractive, particularly around the seven to eight-year area, while we see merit in gradually extending duration further along the curve. This remains consistent with our view that a significant amount of the UK’s fiscal and supply-related risk is already reflected in gilt valuations,” Jon Cunliffe, head of investment office at JM Finn, said.