In today’s announcement from the Bank of England (BoE), the “old lady of Threadneedle Street” has shown that she is certainly getting serious in the fight against inflation – and her ongoing mission to achieve 2% inflation. Today’s announcement from the Bank’s Monetary Policy Committee (MPC) revealed that it has voted to hike UK base rates by 0.5% to the new level of 1.75% by a majority of 8-1.
Clearly there are big implications of this for investors, borrowers and businesses.
As UK inflation rose to a 40 year high in June, hitting 9.4%, with the inflation peak now expected by many experts to be seen in Spring 2023 rather than the autumn this year, what do investment experts think today’s announcement will mean for the UK economy, for consumers and for investment decisions too?
Tim Graf, Head of EMEA Macro Strategy, State Street, comments on the Bank of England’s decision to raise interest rates:
“In confirming the largest hike to policy rates in more than 25 years, the Bank of England did not surprise so much with what they did but what they said. Forecasting a deep and lasting recession coupled with such a sharp rise in rates is a bold step, confirming that the priority remains getting inflation and inflation expectations under control, regardless of the cost. We expect the 50 basis point hike fully priced for the September meeting will be delivered and have little reason to doubt the forecasts of a pronounced slump in activity later this year. GBP remains a currency we favour selling on any rallies.”
Commenting on the BoE’s rate hike, Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management, said: “The 0.50% rise was expected by markets as inflation continues to hit at multi-decade highs and is likely to move higher when the energy price cap is reviewed in the Autumn. The recent large rate moves by the ECB and the Fed had put pressure on the MPC to move quicker and more aggressively given other central banks had adopted faster tightening. The Bank has a difficult balancing act though as the current cost of living crisis combined with higher interest rates and higher taxes means that the growth outlook for the UK is gloomier than it has been since the dark days of Covid, and we’re likely to see a material slowdown in economic activity through the rest of 2022. The inflation continues to be largely supply driven and interest rate increases are not going to assist with these contributory factors to inflation. 2022 will likely be a pivotal year for monetary policy and the risks of a misstep and a recession have increased significantly. The outcome of the Conservative leadership election is also likely to impact the future path of inflation given both candidates have very different views on the near term role of fiscal policy.”
Roger Clarke, CEO of IPSX comments: “This is the end of the era of cheap credit. The BoE raising rates is unwelcome news for borrowers and investors. Higher rates mean higher financing costs for investors and weaker consumer sentiment, which means that allocators will continue repositioning their exposure towards assets with reliable sources of visible income that can act as a hedge against inflation. Fortunately, liquidity isn’t as scarce as it was in 2008, which should prevent commercial property void rates from increasing in any substantial way if a sharp downturn does occur. Certain subsectors are more vulnerable than others as a result of the cost of living crisis, particularly retail, with lower spending likely to dampen performance and capital values. However, low levels of debt and inflation linked lease agreements mean that that commercial property is well placed compared to many other sectors.”
Paul Craig, portfolio manager at Quilter Investors comments:
“The Bank of England has clearly decided that now is the right time to bring out more firepower and raise rates by 0.5% for the first time since 1995. It has clearly taken note of what the Federal Reserve is doing in the US and feels it could be running out of time to grapple inflation and get it under control.
“In the back of the mind of policy makers will be the current public mood. Sentiment is shifting against the Bank of England with a recent survey pointing to more people being dissatisfied with the job it is doing than satisfied people. Clearly inflation has been stickier than expected, but the BoE has been slow to act, preferring instead to raise rates incrementally. That time is now gone, especially with concerns inflation will peak at 12%.
“The other significant shift from the BoE in recent weeks was the dropping of mortgage affordability rules. With the economic picture looking incredibly challenging, and mortgage rates subsequently rising off the back of the BoE’s moves, the decision to drop those rules is looking more and more circumspect by the day. There is a concern the lessons of 2008 are beginning to be forgotten.
“The BoE will feel justified to be this aggressive given the strength of the jobs market, but the data is beginning to roll over. Jobs growth is weakening, PMIs are beginning to show businesses seeing slowdowns, while consumer savings are being depleted. This may be a silver lining for the BoE as with that inflation itself should begin to fall, but with the new energy price cap only a matter of months away, it won’t be long until rate cuts are back on the table to deal with sluggish and potentially negative economic growth.”
Shane O’Neill, Head of Interest Rates at Validus Risk Management, said: “The Bank of England delivered on market expectations today, hiking rates by 50bps – the largest hike for the MPC since 1995. The MPC voted 8-1 in favour of the move, markets were expecting two dissenters so this can be seen as a marginally more hawkish move than expected and could signal more aggressive hikes in the future. The caveat to this is that the BoE have become significantly more pessimistic about the state of the economy, predicting a recession that starts in Q4 this year and lasts through 2023. Not just a technical recession but a drop in output of 2.1, the worst performance for the economy since the global financial crash should it come to pass. Not done with shocks, the bank also predict a peak inflation print of over 13% and to remain elevated through much of 2023 – meaning the cost of living squeeze isn’t going away any time soon.
Unsurprisingly, the market has latched onto the worsening forecasts more than the expected 50bps hike and we have seen the pound fall more than 0.5% against the dollar and the euro immediately following the release. Longer dated gilt yields have also fallen following the release with the 2s10s curve inverting for the first time since 2019. The dreary predictions from the MPC represent ongoing pain for the consumer and focus will quickly turn to politicians to act – with Liz Truss the heavy favourite to take the Tory leadership, she may find the position a poisoned chalice as she takes the wheel just as we enter the worst recession in over a decade.”