After the Bank of England raised interest rates by 50 basis points to 3.5 per cent this week, investment managers discuss the impact of the move and future actions.
The Bank of England increased interest rates by 50 basis points to 3.5 per cent this week – the ninth consecutive increase in rates in the UK – which was widely predicted by the market. They have now reached the highest level since October 2008.
The Monetary Policy Committee voted 6-3 to increase rates, with two members, Swati Dhingra and Silvana Tenreyro voting to keep rates at 3 per cent, whilst one, Catherine Mann, wanted to increase rates by 75 bps in line with their November decision.
The moves came after the UK inflation rate fell to 10.7 per cent in November. The bank also forecasts that inflation will continue to fall gradually over the first quarter of 2023.
Similar actions have been taken by the Fed and the European Central Bank.
Here are some reactions from investment managers to the hike.
Charles Hepworth, investment director, GAM
“It is noticeable that there were split views among the committee, with a majority of six voting for 0.5 per cent, while one member voted for a more aggressive 0.75 per cent and two opted for no change. This helps explain sterling’s weak reaction to the hike.
With the accompanying statement noting that the employment market remains tight with continuing wage inflation pressures, this might seem as similarly hawkish as the Fed yesterday. However, with an increasingly discordant committee, future hikes at subsequent meetings might not seem as obvious even if ongoing inflationary pressures should continue to direct the Bank’s actions.”
Victor Lam, fiduciary investment
"In a letter from the BoE Governor to the Chancellor of the Exchequer, the BoE’s forecasts suggest that inflation has peaked. However, they do note that the labour market remains tight and there is data to suggest that inflationary pressures in domestic prices and wages could mean more persistent inflation, justifying more forceful monetary policy responses."
Dean Turner, economist, UBS
"In our view, inflation looks to have peaked in the UK, with the CPI print for November declining to 10.7 per cent from the 40-year high of 11.1 per cent in October. However, uncomfortably, high inflation could prove sticky until later in 2023, a view shared by the MPC. Furthermore, the BoE has become a little more optimistic on economic growth in the near term, looking for a 0.1 per cent contraction in the current quarter versus the -0.3 per cent projection from November.
In the press release, the MPC indicated that further rate increases may be required to bring inflation back to target. We expect a further 50 bps raise at the February meeting and one more 25 bps hike in March, taking the base rate to 4.25 per cent – the peak, in our view.
However, with the economy slowing, inflation falling, and unemployment likely to rise in 2023, we don’t expect base rates to stay at this level for long. In fact, we look for the BoE to start cutting rates in the fourth quarter of 2023."
Ed Park, chief investment officer, Brooks
“The Bank of England and the European Central Bank (ECB) raised interest rates by 50 bps today, after the Federal Reserve slowed its pace of rate hikes yesterday. This shift downward in the size of hikes implies that central banks are more comfortable that the current level of interest rates will reduce inflationary pressure, but it also indicates that they are getting closer to their terminal rates, which is the expected peak interest rate level for this economic cycle.
“The second question is how long central banks will stay at their terminal rates. The Federal Reserve and the ECB delivered a hawkish message that their intention is to keep rates at elevated levels to tackle inflation. By contrast, the Bank of England has struck a more cautious tone, considering the fragility of the UK economy and the potential impact of small rate hikes on consumer demand.
“The market expects UK interest rates to rise by another 1 per cent, reaching a terminal rate of 4.5 per cent by early summer. The duration of this elevated level will depend on the health of the UK economy and, given the Bank of England’s dovish predilections, it may be one of the first to pivot towards rate cuts. Ultimately, central banks are not in control of their own fate, as global inflationary pressures largely force each central bank’s arm. As a result, it is important to be careful not to read too much into the Bank of England’s dovishness, as it has consistently had to tighten monetary policy more aggressively in 2022 than it had previously, guided to the bond market.”
Antony Antoniou, managing director of central London real
estate agents and investment specialists, Robert Irving
“The Bank of England is going too hard and too fast. We are witnessing the fastest tightening in policy in the MPC’s history, with interest rates rising over 3 percentage points in 12 months.
While yesterday’s drop in inflation was only 0.3 per cent, it was significant because the data we now observe reflects the monetary policy made months ago. With raw materials and energy prices now coming back down to earth, five-year interest swaps dropping, and unemployment rates still historically low (3.7 per cent), these interest rate rises feel unnecessary. The downside is stagnation in areas that should be key drivers for growth, such as development, construction, and the housing market.
Even the MPC members agree that you do see a much deeper and a longer recession with rates being much higher, and I agree that we now risk lengthening and deepening the recession if the tightening continues at this pace.”
Douglas Grant, group CEO, Manx Financial Group
“The hikes should continue to act as a wake-up call for SMEs to review their existing lending situation and ensure that they are prepared. This week’s slowing inflation data suggested that we may have reached a peak but still represented eye-watering numbers and indicate that the start to 2023 will be difficult for many SMEs. We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis. SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. The amount of growth that is being sacrificed is significant and will require new solutions which are designed to address this funding gap.
Despite positive introductions and extensions to loan schemes in 2022, such as RLS Phase 3, more needs to be done. For some time, we have been calling for a sector-focused permanent government-backed loan scheme which brings together both traditional and alternative lenders to guarantee the future of our SMEs. As the government looks for ways to power the economy’s resurgence in 2023, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies and, in turn, our economy. We very much hope this is something that becomes a reality.”
Samuel Mather-Holgate of Swindon-based advisory firm
Mather & Murray Financial
"This was so predictable, yet so disappointing. Millions of homeowners with mortgages who are already suffering with the cost of living will feel betrayed by the central bank for this. You don't cure an illness with the same poison. Every economist recognises that the economy is in freefall and that inflation is widely imported and will fall out of the figures in May. The Bank of England does not need to heap more pain and misery on society with rate increases that won't deal with the problem. The government needs to step in here and widen the Bank of England's mandate to allow it more flexibility and compassion in its decision-making."
Joshua Ellard, head of specialist finance
and research at London-based broker
"The Bank of England's latest rate increase will impact millions of households across the country. Standard variable rates and two- and five-year fixed rates are all likely to increase. As rates increase, the amount people can borrow to purchase a property decreases, which will put downward pressure on house prices. While this decision may concern those borrowers who are on variable rate mortgages, the effect on fixed rate products may not be so drastic. Some lenders have already priced future rate increases into their current products. We are seeing current five-year fixed mortgages at between 5 and 6 per cent. Whilst we may see some increase, I do not expect the full burden to fall on borrowers. However, those on a fixed rate mortgage that expires next year will see an average increase of £3,000 per annum.”
Adrian Kidd, chartered wealth manager at Aylesbury-based
EQ Financial Planning
"What this decision means is that higher mortgage rates are here to stay but, on a more positive note, saving rates will hopefully edge higher. But even then, inflation is so high that returns on cash are wiped out. We need to see inflation fall quicker than it is to change the mood music at Threadneedle Street."