The Bank of England raised rates by 50 bps at their September monetary policy meeting, taking the official rate to 2.25%, the highest level in 14 years. This move was broadly in line with market expectations, although some participants were expecting an even larger increase. It also marks the seventh rate increase in as many meetings.
So, what have investment experts made of today’s news? Check out the commentary below:
Russell Silberston, Strategist at Ninety One, comments:
“The Bank of England raised official interest rates by another 50bps today, bringing Bank Rate to 2.25%. The vote to implement this, however, was mixed, with 3 members of the Monetary Policy Committee wanting a more aggressive 75bps increase and the newest member preferring 25bps. Relative to market expectations, it was marginally dovish, with several participants expecting a larger increase, in line with action from other central banks over recent days.
The root of the Bank’s compromise and today’s neutral decision is that it is just too soon to determine the macroeconomic effects of the government’s Energy Price Guarantee and tomorrow’s Growth Plan. The former will lower the peak in CPI inflation by 5 percentage points early next year but will likely increase demand. The latter will clearly provide further fiscal support at a time when domestic inflationary pressure is increasing. The Bank was therefore left awaiting clarity and promised that they would make a full assessment of the government’s actions at their next meeting in November.
With money markets pricing in a peak in Bank rate close to 5% by summer 2023, the market is more bearish on the UK than it is on the US or eurozone. With active quantitative tightening also kicking off today, there is an awful lot of tightening priced. Whether it’s justified will likely depend on whether the new government’s dash for growth is real or rhetoric.”
Hinesh Patel, portfolio manager at Quilter Investors, says:
“Today’s move by the Bank of England to increase interest rates by 0.50% for the second month in a row is also the sixth consecutive rise as the Bank continues to attempt to beat back the flames of inflation and shore up the soggy pound.
“Markets were expecting a larger 0.75% increase, following the same increase yesterday by the Federal Reserve which pushed sterling to its weakest against the dollar since 1985. The Bank of England continues to be on the back-foot and playing catch up with the Fed, and at 2.25% UK rates lag the 3-3.25% range in the States.
“The BoE also missed an earlier window of opportunity to, at the very least, dampen the impact on sterling. Instead, the Bank is now in a quandary of how to set policy rates with fiscal uncertainty and a ratcheting up of government borrowing. The Reaganesque policies being pitched by the new cabinet may boost growth, but in our opinion will add to core inflationary pressures in the medium term.
“This comes at a time when the net supply of Gilts to the market is being exacerbated by accelerating quantitative tightening. In the near-term, however, money trends suggest the inflationary pulse is in the rear-view mirror. Coupled with the hit to business confidence and consumer spending power this year, we expect the Bank will be hiking into a rapidly deteriorating, but not disastrous, environment.
“For investors, this has now produced one of the most prospectively attractive set-ups for fixed income assets in at least a decade.”
Oliver Jones, Asset Allocation Strategist at Rathbones, comments:
“The Bank of England’s 0.5 percentage point interest rate increase today might have been even larger if not for the government’s decision to freeze energy bills, which policymakers noted should “lower and bring forward the expected peak of CPI inflation”. Three of the monetary policy committee’s nine members voted to follow the Federal Reserve with a larger 0.75 percentage point move instead. However, even if interest rates do not rise quite as quickly in the next few months as the aggressive path previously discounted in markets, there are still significant longer-term risks.
“As the Bank noted, the energy bill freeze will support demand – it’s a major loosening of fiscal policy, potentially worth more than 4% of GDP. That may well be compounded at the emergency budget tomorrow, where substantial tax cuts are likely to be announced, equivalent to perhaps another 1% of GDP. The net result is that underlying inflationary pressure could remain stronger for longer than it would have done otherwise, despite the probable lower peak in the headline rate. The Bank is reserving full judgement on the new fiscal measures until its new forecasts are published in November. But it did suggest that the energy bill freeze will “add to inflationary pressures in the medium term”, echoing the words of the Bank’s Chief Economist Huw Pill in his recent testimony to MPs. The latest inflation and labour market figures won’t have soothed any nerves about the strength of underlying inflation either, with core inflation rising to 6.3% and nominal wage growth still above 5%. If underlying inflationary pressure does indeed remain strong for longer than previously seemed likely, the Bank’s tightening cycle may last longer than is widely anticipated, raising the possibility of further increases in the yields of long-dated Gilts.”
Jo Rands, UK Equity Portfolio Manager, Martin Currie comments on today’s Bank of England interest rate decision:
“The MPC just raised rates by 50bps, taking UK interest rates to 2.25%. The quantum of increase was in-line with the prior move seen in August. Economists were predicting a move of this level, but the market was pricing in a greater move of 75bps. We have seen hawkish moves by other central banks this week, as the fight against more persistent higher levels of inflation intensifies. The Riksbank hiked by 100bps in Sweden, the largest move in three decades and the Fed moved rates up again by 75bps in the US yesterday. So, in this context, the 50bps move by the MPC today actually feels fairly dovish. Overall equity markets did not move much on the announcement, already trading lower post the US market weakness yesterday. However, on a sector level, UK banks drifted lower and retail names had more support.
“The MPC agreed gilt sales will commence shortly, as planned, hence there will be further tightening of financial conditions. Also of note, the committee lowered their expectations for peak inflation, reflecting the impact of the Energy Price Guarantee, but did flag this could add to inflationary pressures in the medium term. The MPC also suggested the deep recession they forecast back in August could now be averted, as a result of this government support. Clearly the mini budget tomorrow, when fiscal stimulus is expected, will also have an influence over the growth (and inflationary) outlook for the UK economy. There are a lot of moving parts right now.”