After the Bank of England raised interest rates to the highest level in 15 years, investment managers discuss what this means for the economy, investors and mortgage holders.

The Bank of England raised interest rates to 5 per cent from 4.5 per cent this week, marking the thirteenth rate rise in a row, in a bid to tackle soaring inflation which stood at 8.7 per cent last month.

Despite the severe impact on mortgage holders, the Bank of England governor Andrew Bailey said: “Many people with mortgages or loans will be understandably worried about what this means for them…but inflation is still too high and we’ve got to deal with it.”

The average two-year fixed residential mortgage now stands at 6.19 per cent while the five year rate is 5.82 per cent. In June last year, those rates were closer to 3 per cent. But chancellor of the exchequer Jeremy Hunt has ruled out any major action to bail out homeowners.

Bailey warned that to get inflation lower, wage rises cannot continue at the rate they have been.

Here are some reactions from investment managers to the latest hike, with markets pricing in 6 per cent by the end of the year.

Jonathan Sparks, chief investment officer for the UK and Channel Islands, HSBC Global Private Banking & Wealth
“Our current projections pencil in another rate hike in the next meeting to take the policy rate to 5.25 per cent, although there is upside risk to this forecast. Shorter data bond yields have risen as the market repriced more rate hikes. There has been less movement in longer-dated bond yields as the market assumes that more hikes now will lead to more cuts later. This does open up a medium-term opportunity for investing in gilts and investment grade bonds if an investor is willing to stomach the near-term volatility, which will be very much driven by the data on wage growth and inflation.  
 
“A big question remains is whether we are at a risk of going into recession as a result of an overtightening of monetary policy. We view this as a real risk, not just in the UK, as central banks are trying to slow growth and are walking a very fine line. There have been signs that their policy is working. On the other hand, there has been an exceptionally high rate of employment, so signs of resilience. We’ve also seen strong wage growth, which was helping with that resilience along with things like savings. This means from a market perspective that we expect volatility to continue as participants wait to see how the hiking cycles play out.”

Daniele Antonucci, chief economist and macro strategist, Quintet Private Bank (parent of Brown Shipley) 
“The Bank of England surprised the market with a bigger than expected rate hike. The 50 basis-point increase versus 25 bps expected follows a reacceleration in core inflation, with the latest report showing broad-based price pressures and other data pointing to a tight labour market and wage growth.This casts doubts on whether the Bank will be able to pause its rate hiking cycle to assess the impact on financial conditions and the real economy, as the Fed did. We expect yet another rate increase at the next meeting, followed by an additional hike and the subsequent one. While this further squeezes incomes and puts downward pressure on the housing market, we believe that the Bank has no choice other than engineering extra economic weakness in an attempt to curb what now looks like self-sustaining inflation.”

Edward Park, chief investment officer, Brooks Macdonald
“The market is of the view that the Bank of England is losing the battle against inflation, and we continue to see further volatility within UK gilt prices. The UK has now had two above-expectation inflation releases in a row, data showing a pay growth that is much stronger than expected and investors have priced in a 6 per cent Bank of England base rate being hit before the end of 2023. This is not only bad news for mortgage holders but the UK Government as it looks to service its debt which has just surpassed 100 per cent of GDP for the first time in over 60 years. Looking ahead, bond investors are pricing in a further interest rate hike at the August meeting after seven out of nine of the of the Bank of England’s voting members opted for a larger 50 bps rise.”

Andy Burgess, fixed income investment specialist, Insight Investment
“Although the Bank warned of further tightening ahead, it shied away from using language that would signal a repeat of today’s bold move and confirmed data dependency. The markets’ initial reaction was that “more now means less later,” with UK gilt yields rallying on the announcement.”

Julian Jessop, economics fellow at the free market think tank The Institute of Economic Affairs
“A more credible central bank might have been able to leave interest rates on hold today. Indeed, two members of the Monetary Policy Committee (MPC) voted to do just that. The full impact of previous rate increases has yet to be felt and there are still good reasons to expect inflation to fall sharply over the remainder of the year, including the rapid deceleration in the growth of money and credit.

“Unfortunately, confidence in the Bank is low after a series of policy mistakes, forecast errors and communication blunders. This MPC was forced to raise rates by an unexpected half a point to demonstrate that it is serious about getting inflation back down – along with signalling that further rate rises could be on the way. It is uncertain whether rates will have to go up again. The bigger increase today may have bought the MPC a little more time. Clearer evidence that underlying price pressures are fading should mean that the peak in UK interest rates will be nearer the current level of 5 per cent than the 6 per cent or more that many fear.”

William Marsters, senior sales trader, Saxo UK 
“The Bank guided for further tightening, although language from the prior meeting was unchanged and they said that the scale of inflation increases drove the decision to hike 50 bps. Terminal rate is still priced near 6 per cent, but the 50 bps move gets us a lot closer. The market’s reaction to the hike initially whipsawed both the sterling and short dated yields as markets digested the announcement and commentary. GBP/USD has now settled little unchanged from before the announcement. This indicates that despite consensus expecting 25 bps, perhaps traders had more of an inclination to the larger hike. The lack of sterling strength also highlights the concern regarding what these hikes will do to the economy.”
 
Isabel Albarran, investment officer, Close Brothers Asset Management
“We are still confident that headline inflation will fall significantly this year but as CPI approaches the 2 per cent target those gains will be harder won, and the too-tight labour market will become an increasing problem. There are signs of labour pressures easing, and falling CPI should help wage growth to moderate, but labour participation remains depressed and economic activity is stronger than the Bank expected at the start of the year.

“Given that long-term sickness remains a key reason behind elevated inactivity, it is hard to see labour capacity improving dramatically. On the other hand, mortgages could cause economic growth to slow. The greater popularity of fixed rate mortgages today means that the effective interest rate on the average outstanding mortgage was still below 3 per cent in May. With 1.3 million households expected to reach the end of their fixed-rate term in the second half of this year, that number is likely to rise sharply. This should leave less cash available for consumption spending, increasing economic slack and diffusing some inflationary pressure.”

Ellie Sawkins, investment analyst, Wealth Club
“Looking for the positives, real GDP increased in Q1 2023, marginally ahead of expectations and the Bank continues to forecast inflation falling significantly during the course of the year, with food prices in particular, expected to calm. However, in what has objectively been a difficult week for the Bank, it has continued its tightrope walk between stubborn inflation and an increasingly fragile economy, albeit with small steps. But one wrong move and the consequences could be painful. Whilst a 0.5 per cent rise will be grim reading for mortgage holders, spare a thought for those in Turkey, where the central bank has just raised interest rates by 6.5 per cent to 15 per cent!”

Douglas Grant, group CEO, Manx Financial Group PLC  
“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 significant uncertainty. 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. The unavailability of finance is exacting a toll on SMEs and the UK economy, impeding growth precisely when it is most needed. The magnitude of the hindered growth is substantial and calls for novel solutions to bridge this funding gap.
 
“Since the economic upheaval caused by the pandemic, we have been advocating for a government-backed loan scheme that provides targeted supported for specific sectors, bringing together both traditional and alternative lenders to secure the future of SMEs. 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.”

Giles Coghlan, chief market analyst consulting, HYCM  
“The BoE is unlikely to clearly signpost how high rates will go at this stage, because the recent rapid pricing is disruptive for UK businesses and homeowners. However, investors should not rule out further hikes to come. Despite the stagflation and pain it will cause in the near-term, market expectations now see rates exceeding 6 per cent in early 2024, and the threat of a recession looms more than ever. We have already seen some GBP sell-off, but this will continue if a recession looks increasingly likely.”

Chris Beauchamp, chief market analyst, IG Group
“The BoE has come down on the side of a 50 bps hike, in a move that seems to set the tone for the next few meetings. The fight against inflation clearly has to step up a gear, and the task now for the BoE is to get ahead of the curve once again. A nod to ‘persistent inflation’ should put everyone on notice that Bailey and co have overcome their reticence about more aggressive hiking.”