Bank of England hikes rates to 1%: what do investment experts say?

Bank of England announces fourth consecutive rate hike as bank base rate hits 1% whilst the Bank says it expects inflation to hit 10% this year.  Three members of the MPC voted for an even bigger hike of 0.5% which sets the tone for what we can expect in the months to come. 

The announcement was made today at midday, when the Bank of England released it’s latest quarterly Monetary Policy Report which sets out the economic analysis and inflation projections that the MPC uses to make its interest rate decisions.

Whilst this latest hike hasn’t come as a surprise to the market given spiralling inflation, what have investment experts made of today’s news? Check out the commentary below:

Luke Bartholomew, senior economist, abrdn said:

“While the decision to hike rates by 25bps to 1% was widely expected, the composition of votes and the large forecast changes has given investors a lot to digest. The Monetary Policy Committee seems to be divided at least three ways, with three of the nine members voting for a 50bps hike, while a further two members disagree with the Committee’s assessment that further rate hikes from here will be necessary. These divisions reflect just how difficult it is to set policy at the moment, with the economy facing multiple conflicting shocks. The Bank has revised its inflation forecasts higher, while it is now expecting a small contraction in the economy in 2023. This is a toxic economic combination, which requires the Bank to make difficult trade-offs over how much it prioritises supporting growth or bringing inflation down. Part of the division in the MPC can therefore probably be accounted for by different policy makers assessing this trade-off slightly differently. All this means it will be remain difficult to extract a clear signal from the Bank about where interest rates are likely to eventually settle, which is likely to be a source of ongoing volatility.”

Caspar Rock, Chief Investment Officer at Cazenove Capital, provides reaction to this afternoon’s policy announcement from the MPC as he comments: 

“In light of the prevailing inflation environment, it comes with little surprise that the Bank of England has opted to raise rates to their highest level in 13 years. The Bank is having to walk a tightrope when it comes to tackling the current inflation surge such that it doesn’t induce a recession, but the 0.25bps hike is a necessary step in our view.  

“Whilst we do not expect to see a repeat of the inflation we saw in the 1970s, we could once again be facing a period of stagflation – that is low growth in combination with higher inflation. Some asset classes and sectors look better positioned than others in such an environment. Commodities have tended to perform well during previous episodes of stagflation – and we increased our exposure late last year. Elsewhere, we continue to hold gold and inflation-linked bonds. We are also tilting our equity exposure towards higher-quality companies with strong balance sheets and the ability to pass on higher costs to customers. Historically, these companies outperformed broader equity markets.

“We remain underweight fixed income, as valuations remain expensive despite recent moves in bond markets. We have a preference for alternative assets as diversifiers and have exposure to gold, absolute return funds and commodities.

“We may be nearing a peak in inflation in the US, though this could be further off for the UK and Europe given their closer proximity to developments in Ukraine. Over the medium term, we expect inflationary pressures to ease from current levels as supply chains improve and higher interest rates reduce demand. At the same time, however, we would not be surprised to see inflation remain persistently above pre-pandemic levels.”

Hinesh Patel, portfolio manager at Quilter Investors believes that the Bank had little choice other than raise rates commenting:

“Today’s move resembles shuffling deck chairs on the Titanic. The Bank will be concerned that inflation expectations in the economy are unanchored from long-term target. Whilst the Bank has shown good form at soothing volatility in domestic funding markets, it has little control of external forces with the exception of trying to support the FX rate.

“As was widely expected, the Bank of England has once again had no choice but to hike rates in its attempt to contain inflation at an appropriate level, this time to 1%. This marks the fourth consecutive rate rise since the BoE began its fight against inflation back in December 2021 when it first raised rates following the pandemic, and the Bank Rate now sits at a level not seen since the aftermath of the financial crisis in early 2009.

“Inflation hit a 30-year high of 7% in March, and the BoE predicts it will hit just over 9% during the second quarter and likely higher still in the second half of the year, averaging slightly over 10% at its peak in 2022 Q4. Given this, the BoE had no choice but to increase rates further still. It is continuing to build in some insurance now should there be a slowdown in economic growth or the jobs market stumbles. With the significant economic impact of the Russia-Ukraine war alongside a multitude of other global risks and plunging consumer confidence, growth will no doubt be challenged and the Bank may be forced to stop tightening even as soon as this year.

“For now, however, it must continue on its path to prevent sterling devaluing further and intensifying the household squeeze. Savings rates could improve following this rate rise, though will only be marginal offset the cost of living crisis currently being faced. With the Fed moving harder with rates yesterday evening, many will have hoped to have seen the same from the BoE today. With inflation continuing to soar, the Bank risks doing too little too late.

“While the BoE may be putting up a confident front, given the current delicate market environment, we could easily see inflation continue to rise above the BoE’s forecasts. Investors will need to continue to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency remain key.”

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