UK Base Rate rises to 0.25% – what do investment experts think?

Following today’s interest rate decision from the Bank of England which took the City and many economists by surprise, what do investment experts think and what do they see as being the main consequences to look out for after the first rise in UK rates since mid 2018?

Georgina Taylor, Multi Asset Fund Manager at Invesco comments ‘The hike by the BoE today suggests they are responding to persistent inflation fears given their inflation mandate which is good news and may see elevated future inflation expectations fall, but of course the ultimate impact of omicron on growth is unknown. How they navigate the mix of growth and inflation from here could, in our view, continue to underpin some volatility in UK asset prices.

“The Bank of England arguably faces more of a dilemma versus other global Central Banks. Inflation is high, in line with other regions around the world, but future expectations of UK inflation also remain very elevated based on inflation market pricing. The UK is impacted by commodity and supply chain related global inflationary pressures, but also faces its own domestic challenges given the impact of Brexit on the supply of labour and specific issues such as energy related price increases in Q1 next year.

“At the same time the new Omicron variant poses a very real growth risk to the economy. Widespread lockdowns can’t be ruled out and the support available for different sectors may look very different to 2020 when the pandemic hit, resulting in ongoing damage to the UK economy. How the Bank of England respond to this combination of factors will be crucial for their credibility going forward. The markets are telling us that the BoE is at risk of making a policy mistake as the yield curve is inverted suggesting any policy tightening now in response to inflationary pressures may have to be reversed pretty quickly. This could lead to a volatile period for UK assets. For example sterling could weaken rather than strengthen in the face of rate hikes if the possibility of a policy mistake remains a risk, and slower growth in the face of ongoing inflationary pressures weighs on sentiment.’

James Lynch, fixed income investment manager at Aegon Asset Management said that for the Bank’s MPC “this meeting was always going to be a difficult one. Do you wait for more news on Omicron impact, or do you focus on inflation and labour market?

“The answer from the BoE was that medium-term prospects for inflation outweigh transient factors. As such, conditions were met for a hike in their opinion.

“You cannot argue with them when looking at the data. The new variant they expect will have less effect than previous waves and if anything will move inflation higher.”

Commenting on the rate hike, Andrew Aldridge, Partner at Deepbridge Capital believes the announcement coupled with rising inflation, will be met with great trepidation by many small and medium sized business owners who are planning ahead for 2022. He comments “SMEs will continue to be concerned about the gradual devaluation of their working capital, and now have the additional worry of the significant increase in cost of borrowing. Subsequently, next year will be very difficult for many companies as the ability to access financial support will become a critical priority for businesses looking to scale up and not only survive in 2022, but also look to thrive and help power the economy’s regeneration.

“Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. With our EIS funds reaching record levels of funding in 2020/21 it is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.”

David Roberts, Head of Liontrust’s Global Fixed Income Team is in  more positive mood commenting  “We are surprised, but pleasantly so. The Bank of England raised rates today, describing the decision as a close run thing. We worried they would come down on the side of caution. With RPI running at 7%, unemployment falling fast and fears that further lockdowns would only fuel further price rises, delaying rate hikes would surely have been a mistake. Inflation still seems set to rise further in 2022, squeezing households and creating business uncertainty. Higher rates now might take the edge off that, not least if it helps push sterling up to curb imported inflation. Indeed, higher rates now could give twin benefits, namely less need to raise further in the future, and room to cut, should the need arise.”

David Page, Head of Macro Research at AXA Investment Managers comments “The case for a hike was clear with inflation elevated and rising more than expected; and a tight labour market with signs of rising pay pressure and second round inflation effects. The hike was in line with our expectation, but against the consensus view (Bloomberg cited only 8 of 42 economists expecting a move today). The MPC acknowledged that this was a “finely balanced” decision and indeed the Committee voted 8-1 to hike, with Silvano Tenreyro voting to leave policy unchanged and await further information in February. Otherwise the Committee was unanimous to leave QE targets unchanged. ”

Pietro Baffico, Economist, abrdn, said Strong inflation and labour market data this week convinced the Bank of England to increase Bank Rate from 0.1% to 0.25% today. Markets expectations were divided ahead of the meeting, given the uncertainty around the economic outlook following the emergence of the Omicron variant. At the same time, policymakers kept the total target stock of asset purchases unchanged at £895 billion. CPI inflation rose to 5.1% in November, and notably Bank staff expect inflation to peak at around 6% in April 2022, before falling back in the second half of next year. Therefore, the Committee signalled that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably. We expect Bank Rate to reach 75bp by the end of 2022, though the risks for investors remain skewed towards a faster tightening cycle, especially if we continue to see inflation surprise to the upside. We will be carefully monitoring the impact of the Omicron variant at home and abroad to gauge the extent to which this weighs on growth, but also impacts inflation through further disruptions to the supply side.”

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