Today, the Bank of England has reported that it’s Monetary Policy Committee (MPC) has opted for its fifth straight hike as it raised rates by 0.25% to 1.25% in its attempt to fight the battle with inflation. UK inflation is currently at a 40 year high, with the latest data showing an annual rise of 9% to April, with huge impacts on the economy and on consumers daily lives. The Bank of England says that it now expects inflation to peak at above 11% by October.
But what does this mean for investments and markets? Some leading commentators have shared their views with us following today’s news:
George Lagarias, Chief Economist at Mazars Wealth Management comments: “The Bank of England delivered a 0.25% interest rate hike. The move, widely expected by markets, needs to be seen in light of the Fed’s very aggressive tightening yesterday. Growth is already slowing significantly, so the Bank chose a more paced approach than the Fed to avoid putting too much pressure on consumers. Having said that, three members voting for a larger hike suggests more pressure on rates going forward. We believe that we are in a new era for central banks, where lowering inflation is their only objective, even at the expense of financial stability and growth. As investors, we are worried about how much and how fast economic growth will slow and how markets will react as they realise they need to search for a new paradigm.”
Hinesh Patel, portfolio manager at Quilter Investors comments:
“Members of the MPC will be reeling from the political and populous backlash coming from record-setting levels of inflation. Andrew Bailey has been on record saying “it wasn’t me” but he is the governor – and must acknowledge they have sponsored government profligacy.
“As was widely expected, today the Bank chose to maintain its course at 25bps, marking the fifth consecutive rate rise since the BoE first began its campaign against inflation, but signalled a larger move may be on the horizon. We expect this will be needed to try and stabilise UK sterling at the very least given the larger hikes in the US.
“While the Bank has further increased rates, it has done so with considerably less gusto than the Fed which last night announced a 75bps hike – making the Bank’s 25bps increase look rather lacklustre in comparison.
“Inflation climbed steeply in April to yet another 30-year high of 9%, and the BoE has once again had to raise its predictions for the longer term as a result. It now expects inflation to be over 9% over the next few months and to rise above 11% in October as a result of the higher projected household energy prices. As such, the Bank had no option but to hike rates in an effort to contain it.
“However, with the outlook of the economy looking increasingly unsteady, particularly following the latest GDP data which showed negative growth of 0.3% for the month of April, the Bank will have been unwilling to hike rates too quickly and thus opted for the safer 0.25% increase as opposed to the 0.5% some originally expected. Given the global risks such as the ongoing Russia-Ukraine war alongside decreasing consumer confidence, growth is expected to continue slowing.
“All together it seems the Bank will be tightening in to a very weak economic backdrop in the quarters ahead, however there is no choice but to go hard-and-fast before inflation expectations become structurally unanchored.
“Given the delicate market environment we could see inflation continue to rise above the Bank’s forecasts – particularly as the goalposts have so often been moved already. Investors will need to continue to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency remain key.”
Chris Beauchamp, Chief Market Analyst at IG Group, comments:
“Once again the BoE looks like the timid cat next to the Fed’s roar against inflation, with just a 25bps hike. Accompanying comments about being prepared to act ‘forcefully’ on inflation will do little when the actual evidence shows the committee remains broadly cautious. A 6-3 vote on 25bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar, and $1.20 will likely be tested once more.”