Bank of England decision – investment experts share their response to today’s interest rate news

by | Aug 3, 2023

Would they or wouldn’t they? 25 basis points or 50? Financial advisers (including those who are on holiday!) have been poised for the latest Bank of England MPC decision on UK interest rates which was released at midday today, 3rd August. But what does it mean for those all important investment decisions and asset allocation strategies which currently hinge on economic data such as this?

Market expectations from economists were that the Bank would opt for a 0.25% hike, up from 5% which was announced last month, to a new UK interest rate of 5.25%. With similar increases in rates in both the USA and Europe recently, the UK follows suit in pursuit of the target to bring sticky inflation under control and towards the BoE’s 2% target.

Today’s hike is the fourteenth consecutive interest rate rise from the MPC and brings interest rates to their highest level in the UK for fifteen years.

However, the impact of lags – especially given the increased penetration of fixed rate mortgages – and recent news of softening inflation and property prices – are causing many to worry that a recession, which has been narrowly avoided so far, may be just around the corner.

Clearly there are particular concerns for the mortgage and property market as well as for people’s finances in general. For investment manager, there is much to consider as the prospect of slow/no growth, the cost of living crisis and pressure on the housing and mortgage markets continue to dominate.

Today’s Bank of England forecasts have been under particular scrutiny, as investors look to gauge the Bank’s views on what’s coming down the line by way of further hikes and when the peak might be.

Investment experts and economists have been sharing their reaction to today’s interest rate news as follows:

William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says:

The Bank of England’s (BoE) action today, shows the Monetary Policy Committee (MPC) has been cautiously encouraged by recent data, allowing them to increase interest rates by just 0.25%. Until a couple of weeks ago, when inflation data for June was released showing a greater-than-expected drop, it seemed the BoE was heading for another 0.5% increase. Notably, underlying inflation indicators for services and core inflation (which excludes volatile items like food and energy) also fell more than anticipated. This was enough to convince the MPC that a lower hike would be sufficient.

It is important to remember not to rely on a single data point too heavily, especially after so many months of inflation remaining higher than expected. Another nagging doubt in the MPC’s collective mind will be the wage growth data, which continues to show regular pay increasing at over 7% p.a.

Latest market pricing of a peak level of interest rates at just under 6% appears more reasonable than the 6.5% that investors were anticipating a few weeks ago. Although a little behind other major central banks, investors will be hoping that the BoE is nearing the end of the rate hiking cycle. If so this should be supportive for asset prices.”

David Goebel, Associate Director of Investment Strategy at wealth manager Evelyn Partners, comments:

Today’s decision by the MPC was always likely to be close, if markets are our guide. Prior to the meeting, Overnight Index Swap markets had priced around a 1/3 chance that the Bank would go further and increase by 50bps.  In the end the MPC’s hawks, who would have preferred such a move, were outvoted by the majority, including governor Andrew Bailey.

A key reason the Bank will have decided against the larger increase will have been June’s inflation numbers, which finally revealed a downside surprise in headline inflation and, perhaps more importantly, the core (excluding volatile food and energy) print.  

The core figure came in at 6.9%, which will still high, was lower than July’s figure of 7.1%.  The expectation is for inflation to continue to fall as lower energy prices continue to feed through to the bottom lines of balance sheets, both for businesses and individuals.  This was reflected in the MPC’s own inflation forecasts, which fell from 5.1% to 4.9% in the fourth quarter of this year, although this was allied with an increase in its inflation expectations over the medium term.

The monetary policy report also included growth forecasts, which continued to make for pretty bleak reading, revealing a cut to forecasts to 0.5% per year for 2023 and 2024.  On the upside, the Bank agrees with the consensus of economists in no longer forecasting a recession in the UK, but it does highlight the risk of one in 2024 and early 2025.  

Previous guidance in the minutes released today was maintained: “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,”. 

There was an Important addition about rates being “sufficiently restrictive for sufficiently long” for inflation to get back to the Bank’s 2% target.  That implies that interest rate cuts are perhaps further away than some had imagined.  

The Bank provided no clues to the market today on its plans for reducing the size of its balance sheet, saying it will lay out these plans at its next meeting in September.  

 Reaction to today’s 25bps increase by markets was dovish, as expectations of where rates will peak moved slightly lower, from 5.85% before the meeting to 5.75% afterwards, at the end of this year or beginning of next.  This will be welcomed by mortgage holders, in the hope that increasing rate expectations may have peaked, along with the cost of mortgage deals in the market. 

The yield on the 10 year government gilt remained broadly unchanged on the announcement and looks attractive in our view, at 4.4%, as the Bank gets closer to the top.

Commenting on interest rates rising, defeating inflation and avoiding a BofE review by the Economists’ Establishment, Charles White Thomson, CEO at Saxo UK, said: “Today’s hike of 25bps by the Bank of England takes the cumulative rate hikes to 515 basis points from the turbo charged days of base rates at 10 basis points. The ‘no ifs, no buts’ war on enemy number one, inflation, is a battle royal and continues to apply significant pressure to the struggling UK economy and consumer. We should not underestimate the speed and ferocity of such rate moves and the pressure this is applying to the leveraged consumer.  The full extent of this has yet to be seen, as with inflation there is lag, including mortgage holders who are rolling off unprecedented super cheap deals. Monetary policy setters, especially in the UK, have a highly difficult conundrum to solve – defeat inflation with the blunt weapon that are interest rates without breaking the economy and consumer. 

The risk for further policy failure is real and the stakes are getting increasingly high. The question of how we got here is a critical one. I want institutions like the Monetary Policy Committee to break the cycle of group think.  It is not just the Bank of England; it is many of the world’s Central Banks and other institutions who suffer from this.  It has been a disappointing period for many of these institutions with key logic based on super cheap money in the form of quantitative easing and rock bottom interest rates and the resulting asset bubbles and inflation driving the existing counter measures. The view on transitory inflation is a classic example – the collective Central Banks filled to the brim with highly qualified Economists, many of whom are all trained in the same institutions in the same financial theory and who, in the majority, believed that inflation would return quickly to 2% because that is what the theory predicted.

This is why I would like a full review of our Monetary Policy, and the performance of the Governor and the MPC to be carried out by ‘generalists’ as well as Economists. Going forward, the MPC and similar organisations should have a mix of Economists as well as informed generalists who should rejoice in their ability to think differently because it generates new thinking. Swimming against the tide is not easy and that is why in the majority of cases, it is more common to have the consensus supporters than not.  

The recent announcement that the distinguished and former Chair of the Federal Reserve, Ben Bernanke, has agreed to lead a review into the Bank’s forecasting and related processes supported by the Bank’s Independent Evaluation Office leaves me with mixed emotions. The review is welcomed but the area of concern is that this is being carried out by the Economists’ Establishment. Though I acknowledge that Economists need to be heavily involved in any review, my ask is to see fresh eyes and the involvement of more experienced and informed generalists so that we bring a less purist view to this important process.”

Marcus Brookes, chief investment officer at Quilter Investors, stated: “Having taken more drastic action at its last decision, the Bank of England has today settled for a quarter of a percentage point rise in interest rates to 5.25% – the highest level since April 2008 when the world was gripped in the financial crisis. Even with inflation coming down faster than forecast recently, this may not be the end of the BoE’s action. Yes, the interest rate rises we have seen to date are beginning to have an effect, but it is not certain that it is enough yet to get inflation back to the 2% target the BoE operates to. As such, we may need to expect another rise later this year.

That said, interest rates probably don’t have to go as high as the market is predicting, currently somewhere above 6%. The UK economy and consumer has been incredibly resilient but are clearly now beginning to be hit. Inflation is falling and should continue to do so for the rest of the year, even if not to that magic 2% number. The next few sets of inflation data will be crucial to see just what impact the BoE has managed to have and what is still likely to come.

The BoE is walking a tightrope at this stage, where the interest rate rises we have seen could tip the UK economy into recession. The BoE will want to avoid that but may have no choice in order to tame inflation. The US is looking increasingly likely that it could achieve a soft landing by keeping economic growth ticking along as inflation comes down. The UK has no such luxury, and as such should a recession become more likely then we will see how long the line that rates will stay this high for an extended period of time can hold.”

John Leiper, Chief Investment Officer at Titan Asset Management, comments on today’s Bank of England interest rate decision: “The Bank of England continues its fight against inflation with a quarter point rate hike today. Inflation in the UK has shown signs of moderating recently but continues to lag progress made in the US and Europe, with money markets pricing in a peak rate of around 5.75%, implying an additional two hikes to come later this year. The three-way split implies some uncertainty within the monetary policy committee, with guidance that rates may rise further if inflation persists. The relative disparity in the trajectory of future monetary policy, against a backdrop of better-than-expected economic growth data, has catalysed a rally in the UK pound this year but momentum has dwindled recently, following the latest inflation number, which came in below expectation for the first time in four months, and signs today that the bank is becoming a little more relaxed around the direction of travel.”

Samuel Zief, Head of FX Strategy at J.P. Morgan Private Bank, commented:  “The decision to opt for a 25bp hike looks to us like a central bank that wants to stop hiking. And the three-way vote split shows why it continues to be difficult to get a sense of the MPC’s reaction function.

We continue to think the BoE has a couple more hikes left in them to a terminal rate around 5.75%, but it is difficult to have conviction over that landing point. We continue to prefer to stick to short-dated UK fixed income given that it provides a compelling yield and a buffer against any further economic resilience that might mean the BoE has to go to 6% or beyond. That said, as we get closer to peak rates in the back half of this year, the risk reward in extending duration is becoming more compelling.

That backdrop isn’t supportive of GBP in our view. On the one hand, further signs of easing in the labour market and inflation might see the rate support that has been driving Sterling higher this year reverse. However, if the economy remains resilient and rates need to rise further, the market will likely become more concerned over potential growth implications later this year and in 2024.”

Luke Bartholomew, senior economist, abrdn, said: “While the Bank’s decision to hike rates by 25bps will be reported as being in line with expectations, there has been significant volatility in market and economist forecasts in the run-up to today’s meeting, with many speculating that a 50bps increase was likely. This volatility is a result of the elevated uncertainty around the outlook for the economy, which was also reflected in the divisions within the Monetary Policy Committee itself, with a three-way split in votes. 

The combination of more encouraging inflation news and weaker activity data was enough to cause the Bank to slow its pace of rate hikes today. And our view is that we are now drawing towards the end of the interest rate hiking cycle, with the economy likely to enter into a recession later this year. 

But if inflation does once again surprise to the upside, then markets will quickly start to anticipate the Bank delivering significantly more monetary tightening.”

James Richard Sproule, Chief Economist UK at Handelsbanken, said: 

“Three way split in MPC voting indicates ongoing debate, The Bank of England’s (BoE’s) Monetary Policy Committee (MPC) has today raised interest rates by 25bp to 5.25%, in line with consensus. The MPC voted in a three way split, with one member voting for no rise (the dovish Dhingra), two members voted for 50bp (Mann and Haskell), and the majority voted for 25bp, including the newest MPC member Megan Greene (who has replaced the dovish Sylvia Tenreyro). We now expect a further interest rate rise of 25bp in September to 5.5%, which we are forecasting will be the peak of this interest rate cycle (market consensus is that the peak will be 5.75%). We are forecasting gradual easing in 25bp steps from mid-summer 2024.

Nominal rates expected to remain above 3% through 2026

Through early to mid-July market consensus had been for UK interest rates to peak above 6% in this cycle, with some stressed scenarios seeing rates potentially rising to 7%. Economist forecasts have been generally more restrained and due to the most recent inflation figures (CPI inflation fell by more than expected from 8.7% to 7.9% in June, still well above its 2% target), market fears of more substantial hikes have eased. The BoE expects inflation to fall to 5% by year end, driven by lower energy and moderating food and goods costs, but services prices inflation is presently over 7% and is expected to remain elevated throughout the remainder of this year. We concur with the Bank’s view and we expect inflation will continue to fall over the coming 12 months, but we anticipate inflation will prove stickier than anticipated once it falls to around 3%, the result of this is that we expect nominal interest rates to remain above 3% through to 2026.

Higher rates are having ongoing impact on house prices

The impact of today’s rate rise must also be reassessed. With 62% of UK mortgages fixed for five years or more, the monetary policy transmission mechanism to the wider economy, traditionally around a year, is taking ever more time to be felt (the Bank is in the process of reviewing this). Even for businesses, where variable interest rate loans are far more common, reassessing business plans and measuring the responses from suppliers, customers and competitors takes time. The result is while people are saving in anticipation of higher debt servicing costs, the biggest impact is on house sales where higher borrowing costs must be immediately factored into any purchase. Our house price forecast remains that we will see a nominal fall of approximately 8% peak-to-trough (here inflation will be helping us, as the real terms fall in house prices will be in the order of 20%), but the number of house price sales we estimate will decline by 40% from peak to trough.”

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “The Bank of England (BoE) hiked base rate again today as it continues to battle inflation. The base rate is now 5.25%, a 15-year high, following the decision of the Monetary Policy Committee (MPC) to increase it by 0.25%.

The end of the hiking cycle could now be in sight amid signs inflation has turned the corner, but that doesn’t mean interest rates will start falling any time soon. Irradicating inflation will take patience and persistence from the BoE and households will continue to face higher borrowing costs for some time.

The MPC can now monitor data further, consider the lagged effects of the tightening so far and look to reduce the risk of going too far and inflicting more pain than necessary on the economy. Encouragingly, there are early signs of slack in the job market and factory gate prices stabilising, so it is likely that inflation will fall quite rapidly from this point and start to make the Bank’s job easier.”

The Bank of England’s hawks slow their pace, but should not be mistaken for doves – Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, states:

“The Bank of England’s announcement today of a 0.25 base rate hike represents a slowing rate-hiking pace but may not indicate the end of monetary tightening. While inflation has begun to abate, prices in the service sector remain worryingly elevated and above levels forecast in the previous Monetary Policy Report. An unsettled committee, whose predictions have not materialised, has therefore continued on a rate-hiking course. 

Today’s decision highlights the Monetary Policy Committee’s concern around persistent service sector and wage inflation. The committee voted 6-3 for the hike, and two members voted for an even more aggressive increase, demonstrative of their overarching unwillingness to push against financial markets which are priced for a peak base rate between 5.75% and 6%.

The accompanying Monetary Policy Report sets out weaker quarterly growth projections relative to its May Report, but does not expect a recession. Everything now hinges on the evolution of wage growth and service sector prices. While the Report forecasts inflation to decrease to 5% by the end of the year, hitting the government’s aspirational target if achieved, it anticipates services inflation to remain elevated. There will be two labour market and inflation updates before the next MPC meeting on the 21st September. If the hawkish forward guidance holds true and wage growth and service sector prices remain strong, the base rate may be raised even further”.

Steve Clayton, head of equity funds, Hargreaves Lansdown, states:

 “This was a tough call for the Bank’s policy committee. In the end, six members voted for the quarter-point hike, two for a half-point, with only one voting not to raise at all. Inflation data has been improving, but the economy remains stronger than many expected. In the end, the Bank opted to play it safe. A quarter-point rise keeps the pressure on – but does not add too much to the heat. 

In their commentary, the MPC highlighted that market expectations for future levels of rates had risen sharply, to average almost 5.5% over the next three years, with a peak level of just over 6%. The committee pointed out the increasing conflicts in the data. They stressed that pay growth in particular, at 7.7%, is far ahead of their earlier expectations and risks embedding elevated inflationary expectations into the economy.

Inflation is seen falling to around 5% by year-end and does not reach the 2% target level until 2025 Q2, with risks on inflation skewed to the upside. The Bank sees its monetary stance as restrictive at these levels but, even so, the MPC stress they are prepared to go further should evidence of more persistent inflationary pressures emerge.

So far, the markets have been relatively approving of today’s move and the MPC’s statement. Gilt yields have fallen a shade, including the 2 and 5 year levels that are important for where fixed rate mortgages may be headed. Sterling took a lurch down, even though it was already at its month’s low against the dollar before recovering a fraction to $1.265. The stock market has, so far, taken the hike positively with the FTSE trimming earlier losses, to stand at 7515 shortly after the announcement.”

Andy Burgess, Fixed Income Investment Specialist, Insight Investment, said: “In a decision that had something for everyone, the Bank of England voted 6-3 to raise rates by 25bps to 5.25%; one member voted for no change, while two voted for a 50bp hike.

The Bank acknowledged that current policy was restrictive and may have to stay that way for a “sufficiently long” period. Indeed, as we near the peak in rates, the focus may start to shift from how high rates go to how long they will stay there.

The risk of recession remains ‘significant’, although strong pay growth and elevated levels of service inflation suggest that “persistent inflationary pressures may have begun to crystalise.

In our view, however, headline inflation is likely to continue to slow from here, not least due to base effects and energy prices continuing to fall. The Bank remains data-dependent, with inflation data released in the months ahead critical to how high rates ultimately go.”

Nicolas Sopel, Head of Macro Research & Chief Strategist, Quintet Private Bank (parent of Brown Shipley) on BoE interest rate rise, said:

“The BoE noted some progress on the inflation front, “falling but still too high”. However, the Bank’s projections, which were revised slightly lower for 2023 and 2024, still revealed that inflation will remain above the 2 per cent target and only return to that target by the second quarter of 2025. This underscores the MPC’s view that the Bank Rate must remain restrictive for longer. 

While economic data has turned more mixed and despite slowing growth, we think that the Bank of England will continue to raise the Bank Rate in 2023, bringing it to 6 per cent. This is because underlying price pressures remain elevated, driven by strong wage growth. The BoE will likely be the last central bank in developed markets to pause its tightening cycle.”

Ulrike Kastens at Economist Europe, states:

“The end of interest rate hikes is also approaching in the UK, The Bank of England today raised its base rate by another 25 basis points to 5.25 per cent. This is the highest level in 15 years. The key factors were the tight labour market and stronger wage growth, while core rate and service price developments were in line with the central bank’s expectations. All in all, the message of today’s press statement is much more balanced than in June 2023. While risks to the inflation outlook are still skewed to the upside, they are less pronounced than in May 2023. Wage developments, in particular, will need to be monitored closely to see whether they could crystallise into persistent inflationary pressures. In contrast, the central bank described the current interest rate level as restrictive. However, there are no signs of a pause in monetary policy. Mainly because of the ongoing strong wage development, we expect a further increase in the base rate by 25 basis points to 5.50 per cent in September.”

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