Are we there yet? Bank of England decision to hold interest rate triggers strong reaction from investment experts and economists

by | Sep 21, 2023

Yesterday’s shock data which showed UK CPI inflation at the lowest level for 18 months, has certainly given the Bank of England‘s Monetary Policy Committee (MPC) cause to think hard about today’s interest rate decision.

With markets finding it almost impossible to call ahead of the meeting, today’s interest rate announcement that rates will remain at 5.25% has huge relevance for the UK economy, for investors and businesses and also for millions of households whose budgets are already under considerable strain due to the ongoing cost of living crisis.

But have we reached the end of this extreme hiking cycle? Further commentary from the Bank later today will give a clearer view of their outlook for the UK economy although they have said that further tightening might be necessary in the months to come.

Investment managers and economists have been sharing their reaction to today’s interest rate news as follows:

Richard Garland, Chief Investment Strategist at Omnis Investments, comments on today’s MPC decision: 

The Bank appears to have concluded that monetary policy is tight enough already to stem strong wage growth given weakness emerging elsewhere in the labour market, sufficient to bring inflation back to target. This week’s better-than-expected inflation print possibly helped with the BoE’s decision to not hike today. There were doubtless conflicting views but in the end the doves’ observation that previous tightening has still to affect the economy – already weakening – seems to have won out. The MPC still refers to its flexibility to react should things change, but the chances are this could be the peak in this UK interest rate cycle.”

Bank of England stuns with unchanged base rate – Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services stated:

“The Bank of England’s Monetary Policy Committee has surprised the financial markets and delivered some relief to hard-pressed households by maintaining the base rate of interest at 5.25%.   

Undoubtedly, the overriding factor behind the Bank’s decision has been the fall in the UK’s inflation rate in August, particularly the sharp drop in underlying price pressures which indicate that earlier rate increases are beginning to work. 

Moreover, the economy’s weakness in July means that activity over the third quarter has been revised downwards, below the Bank’s previous expectation. This is a clear sign that inflationary pressures, including wage pressures, will continue to abate over the autumn months. 

In addition, recent data points to a slight easing in the labour market, confirming a slight increase in the unemployment rate which now stands above the Bank’s forecast.   

Also serving to sway policymakers, recent business surveys point to further weakness in coming months.  The MPC is likely to have had early sight of tomorrow’s purchasing managers’ survey, thought likely to confirm subdued activity across both the manufacturing and service sectors.

 Marcus Brookes, Chief Investment Officer at Quilter Investors stated:

“While it may return to raising rates later in the year or into next year, the Bank of England has been bold and is signalling that its job is nearly done for now. Inflation surprised to the downside yesterday and with economic data rolling over, the BoE clearly feels it now has enough cover to hit the pause button and assess things as we go. Market expectations of rates at or above 6% always appeared a little toppy, and clearly the data is trending in the right direction for the BoE to take this decision. With an election around the corner next year, it will be playing on the minds of the decision makers not to overcorrect and instead begin to assess what impact the action to date has had.

Andrew Bailey and the rest of the Monetary Policy Committee will also be looking closely at the US, where the Federal Reserve hit the pause button on interest rates. Sentiment across the pond remains hawkish though, with one more rate rise expected this year. Clearly that economy is in a much stronger position so can probably take another rate rise, but they are looking to reach the end of the hiking cycle and the Bank of England will not want to diverge too greatly from a key economic power. As such, we wouldn’t be surprised to see the BoE begin to mirror the Fed once again.

However, while this may be the end of the interest rate hiking cycle, this doesn’t mean the pain will simply go away for businesses and consumers. The BoE has made it clear that rates will be higher for longer, so investors need to prepare accordingly. Quality companies, with stable and sustainable cashflows will ultimately benefit most from a period of rates being above 5%, and as such now is a time to hold the nerve and not try to time any cut in rates, as these are a long way off for now.”

Commenting on the pausing of an interest rate hike providing some reassurances for businesses and consumers alike, Douglas Grant, Group CEO of Manx Financial Group PLC, said: “After the unexpected and encouraging decrease in CPI inflation witnessed yesterday, an interest rate hike has also been paused providing some reassurances for businesses and consumers alike. With Small and Medium Enterprises (SMEs) representing approximately half of all private sector turnover in the UK, it is imperative that we devise innovative measures to safeguard their viability. SMEs should continually look to assess their existing lending structures and proactively prepare for the challenges ahead. 

Recent research conducted by Manx reveals a significant shift in the financial landscape for SMEs. Compared to last year when only a quarter encountered obstacles, two in five SMEs have now either halted or slowed down some aspect of their operations due to a lack of external financing. Furthermore, the survey uncovered that 15% of SMEs in need of external finance and/or capital were unable to access the required funds. This scarcity of financial resources poses a substantial impediment to SME growth, necessitating immediate action to bridge the funding gap. 

In light of implementations such as the short-term loan schemes introduced in recent years, we firmly advocate for the continuation and expansion of government-led initiatives aimed at bolstering SME resilience and reigniting growth. Our proposition revolves around the establishment of a permanent government-backed loan scheme, tailor-made for various sectors, and involving both traditional and non-traditional lenders. As apprehensions mount regarding the future state of the economy, the implementation of such a permanent scheme takes on paramount importance; it has the potential to serve as a pivotal factor in sustaining economic recovery and ultimately influencing the survival prospects of numerous companies.”

Luke Bartholomew, senior economist, abrdn, said:

“After yesterday’s inflation data, today’s policy decision looked to be on a knife edge. So while the decision to keep rates on hold is a formal surprise compared to market and economist forecasts, it is not really a shock. 

While the Bank has suggested it could hike again if inflation proves to be more than expected, it is likely that interest rates have now peaked. The economy is deteriorating rapidly, and we expect a recession later this year. 

In that context, despite the talk of a “Table Mountain” profile of an extended pause in interest rates, we think investor speculation will very quickly turn to the timing of the first rate cut.”

Hugh Gimber, global market strategist at J.P. Morgan Asset Management said:

What a difference a data point makes. Ahead of this week’s inflation print, a 25 basis point hike to UK interest rates was largely assumed as a done deal, with signals from the labour market in particular highlighting that more pressure on the economic brakes was required. Yet in light of today’s decision to hold rates stable, it seems that easing price pressures in the services sector have done enough to tilt the Monetary Policy Committee away from further action. Despite efforts in the statement to keep the door open to further hikes, many investors will now assume that the Bank of England’s hiking cycle has concluded. 

We see two key risks to this view. In terms of the domestic picture, the recent easing in services inflation was primarily driven by seasonal factors linked to airfares and hotel prices. While the Bank will now be hoping that this cooling broadens to other parts of the economy, strong wage pressures stemming from structurally tight labour markets make this far from assured. The 25% rally in oil prices since midyear is another watch item, given the way that it could offset lower domestic energy prices in the months ahead. 

With every step higher in interest rates, recent communication has highlighted that the risk of overtightening has become a greater factor in the Bank’s decision making process. Unfortunately, some weakening in activity is unavoidable in order to put the inflation genie back in the bottle. The risk of today’s decision is that the Bank may yet be forced to apply the brakes more sharply at a later stage.” 

Emma Wall, head of investment analysis and research stated:

“This is good news for investors – coupled with the news yesterday about inflation coming down, pausing rates indicates greater conviction in the economy, and the end – or near end – of this rate hiking cycle. 

Inflation is bad news for nearly all asset classes, it both erodes returns and makes it harder for investors to find cash to invest in the first place. Yes, higher rates have been good for both cash and gilts, but they’ve also been a sign of economic malaise, so investors should welcome this move from the Bank. UK equity income funds offer an interesting opportunity- an undervalued market with good dividend cover will help combat inflation while it (hopefully) dwindles.”

Thomas Sartain, Senior portfolio manager for fixed income at Invesco, comments following the Bank of England’s decision to maintain the interest rate at 5.25% today:

“The market was ultimately priced close to 50:50 for a hike of 25bps/no change going into the meeting – after this week’s downside miss on inflation data resulted in a paring back of the likelihood of a hike. The inflation release for August indicated that  “inflation persistence risks” the MPC are concerned with appear to have receded notably. The decision was a close call, with a 5-4 vote.

Recent communication from the bank has suggested they are close to the end of the hiking cycle – such as Bank of England chief economist, Huw Pill’s analogy of the path of bank rate preferring a Table Mountain approach of a long peak, rather than the Everest profile on policy (sharply up and back down again). The inflation release proved the final catalyst to press the pause button.

Looking forward, we see headwinds continuing to build for the UK economy – the labour market is clearly losing momentum and interest rate sensitive sectors of the economy are feeling the pain from higher rates.  Once it’s clear this period of high inflation has passed, a policy rate of 5.25% will be significantly restrictive for the UK economy and will increasing bear down on activity. We expect a series of rate cuts in 2024.”

Commenting on BoE’s cautiously hawkish interest rate pause, Tom Hopkins, Portfolio Manager at BRI Wealth Management, said:

‘’The Bank of England have decided to hold interest rates at 5.25%. ’This marks the first pause after 14 consecutive rate hikes over the last 18 months.  

The nine members of the MPC were clearly split with five members of the MPC voting to keep rates unchanged against the 4 members who voted to increase. 

The decision to not raise interest rates comes after recent CPI data earlier this week that showed UK inflation dipping to an 18-month low, coupled with a sharp decline in the core rate which bolstered the argument for a cautiously hawkish pause. 

The UK’s annual inflation rate slowed to 6.7% last month amid weaker growth in food prices and monthly falls in the cost of hotels and air travel. Today’s decision to pause follows the same path as the Federal reserve yesterday, however it’s too early to rule out any further rate hikes this year. ‘’

Henrietta Walker, Head of Investment Specialist Team at Brooks Macdonald, said: 

“The BoE has paused its hiking cycle, voting 5 to 4 to leave rates unchanged at 5.25%. Market expectations beforehand were on a knife edge, as August’s annual core inflation came in at 6.2%, materially below consensus estimates and a big fall from July’s 6.9% number. However, against this UK wage growth announced last week was hotter than expected, and is now running positive in inflation-adjusted terms. 

While today’s news provides welcome respite for homeowners looking to remortgage this year, the recent sharp uptick in the oil price, up around a third since June, together with the robust real wage growth, indicates the inflation dragon is still yet to be tamed. The BoE faces the unenviable challenge of bringing inflation back down to 2% while steering the economy clear of a hard landing, against the backdrop of the steepest rate hike cycle in 30 years. 

Yesterday, the Fed took a similar course of action, voting unanimously to hold rates steady, albeit at a 22 year high. Investors eagerly awaited the officials’ interest rate projections, often called the ‘dot plot’. These indicated a ‘hawkish pause’ with the likelihood still of another hike later this year, but fewer cuts expected next year.”

Janet Mui at wealth manager RBC Brewin Dolphin stated:

“The BOE was on hold today, keeping the Bank rate at 5.25%. It was a close vote of 5-4 and the Bank guides that interest rates will remain at restrictive territory for sufficiently long. So although today’s decision is dovish, the guidance is hawkish to dampen the expectation of a rate cut in 2024. Indeed, core inflation is still running at over 3 times and wage growth is 4 times the 2% inflation target. 

The pause in rate hike suggests the BOE is getting cautious about the lagged impact of rate increases on the economy, particularly as an increasing number of households refinance into significantly higher rates. The other factor is that the latest data from the UK jobs market has weakened and the trend is expected to continue into 2024. 

Households who are on tracker mortgages will be relieved at today’s decision, while fixed mortgage rates have scope to come down as short-term market rates fell. Though overall we will remain at a tight monetary policy environment that will act to restraint activity, thereby slowing inflationary pressure.

Sterling has taken a hit post decision, a continuation of weakness also driven by US dollar strength. The internationally exposed FTSE 100 has been supported, as a result of sterling weakness, as foreign receipts translate into higher revenue in sterling terms. The small and mid-cap FTSE 250 also enjoyed a lift given its vast exposure to international revenue, but also supported by the bounce in real estate stocks at the prospect that the last rate hike is behind us.”

David Zahn, Head of European Fixed Income at Franklin Templeton, shares his views following the Bank of England rate decision 

“The Bank of England (BOE) kept rates unchanged today by pausing interest rate increases. The BOE may possibly have to hike again if inflation doesn’t continue to decline, however, we may have seen the last interest rate hike from the BOE in this cycle.  

“Economic data continues softening and inflation is declining and should continue into next year.  Gilts look at attractive levels with the BOE on hold.  We are currently positioned long duration in our UK Gilt fund and have added Gilts, currency hedged, into our European fixed income accounts in anticipation of a less hawkish BOE going forwards.”

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