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Bank Of England Raises Interest Rates – Reactions

Amanda Cheesley

4 November 2022

The monetary policy committee voted this week 7 to 2 to increase the base rate of interest by 0.75 percentage points, reaching the highest level since the global financial crisis in 2008.

The bank said in a statement that inflation is too high, with high energy, food and other bills hitting people hard. “Raising interest rates is the best way we have to bring inflation down,” it added. 

The bank expects inflation to fall sharply from the middle of next year, but it warned that the UK is already in recession and that it could be a prolonged one. 

Here are some reactions from investment managers to the move.

Andrew Lilico, chairman of the Shadow Monetary Policy Committee and IEA economics fellow
"A 0.75 per cent rise in the Bank rate is about right in current circumstances. The Bank needs to keep pace with international rate rises and some normalisation in rates will be healthy for the long-term growth of the economy. But monetary growth is quite low so inflation should return to target in due course without a need for rates to rise more than a little further.

We should anticipate more rises to come but the Bank will need to manage down expectations about the peak, so as not to lurch from a policy that was too loose in 2021 to a policy that was too tight in 2023."

Antony Antoniou, managing director of central London real estate specialists, Robert Irving Burns
“It’s been a case of who blinks first, as city investors keep their powder dry waiting for the impending market correction, and sellers are loathe to bend on price; but today’s gloomy predictions will break the deadlock and we are already seeing a softening of values in the West End reported by the likes of Capco.
Sophisticated investors are unlikely to remain in cash, especially while inflation is still outstripping the cost of servicing debt, so we’re expecting to see the floodgates open and a surge of activity before Christmas.
Overseas investors are still able to secure a great deal on prime assets and we’re also expecting to see the smaller buy-to-let investors, whose margins have been squeezed hard by the rising mortgage market, taxation and cost of living crisis, cashing out to release their equity, which will bring new residential stock onto the market.”

Josh Mahony, senior market analyst at IG Group
“Today’s 75-basis point hike from the Bank of England represents the most dramatic tightening move from the Bank since 1989, with seven of the nine members all agreeing that the pace of tightening should be ramped up in the face of double digit inflation. While the Bank of England’s decision to hike by such a degree was widely expected, it represents a notable step change from the slowing pace seen in Australia and Canada.

The FOMC warning that rates will likely have to rise further than previously expected does provide similar expectations for the UK, with European central banks faced with the fear that a looser approach compared with the Fed will bring further FX weakness and thus higher imported inflation. Unfortunately, today’s decision brings expectations of tougher times ahead for the UK economy, with a new frugal approach from the government meaning that we are likely to see a 2023 that will prove tough for both consumers and businesses alike."

Nicholas Hyett, investment analyst at Wealth Club
“The Bank of England has raised interest rates to 3 per cent, a level not seen since 2008. This is the eighth increase in a row and the biggest single rate rise since the late 1980s. The Bank’s inflation forecasts have also been announced which show that CPI is expected to remain high at around 11 per cent in the near term before falling back next year, although it is expected to remain well above the Bank’s 2 per cent target.
The market reaction was unremarkable, given that the 75 bps was already priced in and widely predicted.
However, the overall economic picture is probably better now than it was a month ago after the mini-budget turbulence. The bank may well feel it can ease its foot off the gas going forwards – with rates rising slower and ending lower than we might have thought a few weeks ago. It’s too early to call time on rate rises, but increases could be slower from here – reflected in the fact that two members of the committee voted to raise rates by less than 0.75 per cent this time round.
It helps that the government and bank are now pulling in the right direction. The Bank raises rates to curb inflation by discouraging people from spending money. Rishi Sunak’s plans to raise taxes and cut public spending have the same effect. The recent stability in sterling reduces the need to hike rates to defend the currency too.
Recent macroeconomic data suggests that previous rate rises are starting to have an effect. House price growth has slowed and perhaps even started to reverse. Consumer lending more broadly is also falling as the general public look to nurse wallets and purses over what is set to be a difficult winter.
It’s far too early to call time on rate rises, but at least the two giants of British economic policy, the Bank of England and HM Treasury, no longer look like they’re squaring up for a bare knuckle boxing match. A joined up effort should calm market nerves and could help mitigate the long-term pain.”

David Goebel, associate director of investment strategy at UK wealth manager Evelyn Partners
“Markets had been pricing in continued rate hikes up to as much as 5.25 per cent next year, but the Bank made clear in its statement today that this was not a likely path, saying that the peak in rates will be “lower than priced into financial markets.” It forecast that following the market path would result in a long recession – two years from Q3 2022 to Q3 2024 – and reducing inflation to near-zero, far below the Bank’s 2 per cent target.

This implies that the peak for bank rate will be below 5.0 per cent.

For market-watchers and investors, a divergence between the rhetoric from the US Federal Reserve at their meeting yesterday and that from the Bank’s today can be observed. Fed Chair Jerome Powell warned markets not to underestimate the likely path of interest rates while the MPC effectively implied the opposite about UK rates. This has resulted in GBP weakness in the market today and could continue to have that effect in the short term. GBP weakness benefits those companies listed in the UK who derive a considerable proportion of their earnings overseas, like the oil companies, which also look set to continue to benefit from the prevailing environment of high prices.”

Victor Lam, fiduciary investment specialist at ZEDRA      
"The move today was widely anticipated although the vote was not unanimous, with a vote of 7 to 2, with one member voting for a 50 basis point increase and another preferring only 25 basis points. Prior to the announcement sterling had been gradually falling versus the dollar and spiked below $1.12 when the rate increase was announced. UK equity markets increased on the announcement before falling back to prior levels.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown
‘’It’s proved to be yet another dismal day for the pound as forecasts of a long recession cast a dark shadow over the UK economy. Sterling dropped by 1.9 per cent to just $1.116, its lowest level for two weeks, before recovering slightly. Investors have been assessing the bleaker outlook for Britain amid forecasts that unemployment could shoot up to just shy of 6.5 per cent by 2025. The pound has been sideswiped yet again by expectations that the Federal Reserve will be ahead of the curve on rate rises, with chair Jerome Powell warning that interest rates are set to linger for longer. Although the Governor of the Bank of England, Andrew Bailey, indicated that the Old Lady was not yet for turning on rate rises, he said the peak will be lower than market expectations which this morning were currently hovering around 4.6 per cent for June 2023.”