At midday today, the Bank of England (BoE) released the latest Monetary Policy summary and minutes of the Monetary Policy Committee meeting – MPC is the body responsible for making decisions about Bank Rate.
The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 16 March 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.25 percentage points, to 0.75%. One member preferred to maintain Bank Rate at 0.5%.
The MPC also commented that, based on its current assessment of the economic situation, the MPC judges that “some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve.” Given the huge levels of uncertainty and inflation at a 30 year high in the UK, the chance of further tightening in future is not a surprise.
Following today’s announcement, Paul Craig, portfolio manager at Quilter Investors believes that the Bank had no choice but to raise rates as he comments:
“The Bank of England began its fight against inflation back in December when it first raised rates following the pandemic. This is the next step in what is becoming a protracted story in containing inflation at an appropriate level. It is now seeing inflation hit 8% in the second quarter and perhaps even higher in the second half of the year. Ultimately a double digit inflation rate is not off the cards.
“The BoE had no choice but to keep raising rates. It is looking to build in some insurance now should there be a slowdown in economic growth or employment comes in worse than feared. With global risks and the Russia-Ukraine war having a significant economic impact, growth will be challenged and thus the Bank may need to reverse course later in the year.
“But for now it needs to follow the path to stop sterling devaluing further and intensifying the household squeeze through import prices and the global commodity sector which is priced in dollars. Savings rates could improve from here which might offset some of the cost of living crunch, but with inflation proving difficult to contain it might all be a little too late.”
Caspar Rock, Chief Investment Officer at Cazenove Capital, provides reaction to the announcement and expects the Bank might tread more cautiously come the spring commenting:
“Amid inflation forecasts of 7.5 per cent by spring, it comes with little surprise that the Bank of England has opted to raise rates by a further 0.25 basis points to 0.75 per cent.
“The nature of the shock from soaring energy and commodity prices which has struck the UK economy following Russia’s invasion of Ukraine puts the MPC in a very difficult position. Steering inflation back to the target of 2%, despite any trade-off this may present for economic growth, is still set to be its priority and we continue to hold the view that there are several rate hikes to come.
“However, the Bank may tread more cautiously in the spring as it assesses the impact of the rise in National Insurance and the energy price cap. Looking forward, the prospects for further rate rises are likely to depend on the extent to which oil price rises feed through to other areas of the economy, particularly wages.
“From an investment perspective, volatility across global financial markets since Russia’s invasion of the Ukraine has encouraged investors to once again search for defensive asset classes. In the near term, the outlook for government bonds looks more challenging, with both nominal and real yields likely to continue moving higher from current low levels. We think alternative assets have an important role to play in diversifying portfolios in the current environment.”
Rob Clarry, Investment Strategist at Tilney Smith & Williamson, which is set to re-brand to Evelyn Partners in the summer, highlights two reasons which he feels are most strongly behind today’s call commenting:
“The Bank of England faces a difficult balancing act. On one side, it’s trying to support UK growth as the economy recovers from the pandemic. But on the other side, it’s trying to prevent above-target inflation from running away and becoming embedded within expectations. Today’s decision shows that the Bank favours acting now to keep inflation expectations under control.
“In our view, there are two main reasons underpinning this decision. First, the UK labour market is showing increasing signs of tightness. This week’s jobs report showed the unemployment rate had fallen to its pre-Covid level of 3.9%, while job vacancies reached record highs of 1.3 million. However, these data points do not provide the full picture. This tightness has been exacerbated by workers leaving the UK labour force over the last two years. Total employment and total hours worked remain below pre-pandemic levels, which indicates that people have left the workforce, with many entering early retirement. An increasingly tight labour market could force firms to increase wages as they compete for labour, which risks even higher inflation.
“Second, elevated energy prices were already concerning the Bank, and the war in Ukraine means that prices are likely to be even higher than forecast in February. In the past, the Bank has tended to ‘look through’ energy price shocks because higher interest rates can worsen the negative growth impact of higher energy prices. But for now, it seems that the Monetary Policy Committee (MPC) is more concerned about getting inflation under control.”
“Looking forward, we expect small policy adjustments as the MPC monitors the latest data coming from the labour and energy markets. Money markets now expect interest rates to hit 2% by the end of 2022.”
Given the Bank’s warning that inflation could breach 8%, co-head of the Liontrust Global Fixed Income Team Phil Milburn comments:
“The Bank of England faces a particularly acute policy trade-off, trying to put the inflationary genie back in the bottle at the same time as the UK consumer suffers a cost-of-living crisis. In their words, “developments since the February Report are likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes.” Clearly the latter factor has influenced the MPC members to a greater extent and the rate rise today was accompanied by dovish language.
“The vote itself was 8-1, with Cunliffe the dissenter looking to hold rates steady. In my opinion the taming of the hawks was more pertinent, the prior four voters who wanted a 50bps hike finding new comfort in their dovecotes. Rates markets have focused on the following sentence: “based on its current assessment of the economic situation, the committee judges that some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement.”
“Certainly, the pace of Bank of England rate rises will be slower than the market had forecast ahead of today’s meeting. Inflation still needs to be conquered as there is the risk it becomes self-fulfilling through the feedback loop of corporate and consumer expectations, in particular wage inflation. It should be borne in mind that the Bank of England has said it can start Quantitative Tightening (QT) once rates hit 1%, which is only one hike away. This gives them another tool, but it will still be a good few years until inflation is back down anywhere near target. The UK may be the one exception where the central bank does actually have to create a recession to get inflation back to 2%.
“The crux of the problem is that around the developed world monetary policy was kept too loose for too long and a blind eye was turned toward inflation. It clearly is not transitory and now rates have to go up further than they otherwise would have. Exogenous events, such as the energy price crisis, are beyond central bankers’ control. But the monetary policy tightening journey would have been so much smoother if it had been started before inflation became embedded in expectations.”