Following yesterday’s worse than expected inflation data, the question for wealth managers hasn’t been will the Bank of England’s MPC raise base rates at their June meeting. Rather, it’s been a matter of how much will they hike by?
Today’s announcement from the MPC that UK base rates have been raised for the thirteenth consecutive meeting comes as no surprise. The UK base rate will rise by 0.5% to a new rate of 5.0% as the Bank tries to use the tool in an attempt to control rising inflation, which remains well ahead of the target rate of 2%.
Investment experts have been sharing their reaction to today’s base rate hike from the Bank of England, and what they believe it means for the investment outlook as well as asset allocation decisions, as follows:
| George Lagarias, Chief Economist at Mazars comments: “A double rate hike was appropriate following yesterday’s bad inflation number. The wage-price spiral won’t break itself. The central bank’s move is a step towards the right direction. Unfortunately, from where we are today, there aren’t many good options. The UK is in a vicious inflation cycle plain and simple. Unless demand is decisively curtailed, there’s a real danger that inflation will get out of hand. Make no mistake, this means significant pain for consumers. The government could step up to alleviate pressures in the labour market and increase housing availability, which should help diffuse the inflation bomb faster. Presently, markets are discounting four more rate hikes, a one percent higher rate by the end of the year.” |
On the Bank of England’s decision today, Edward Park, Chief Investment Officer at Brooks Macdonald, said:
“Yesterday’s surprise CPI release struck a hammer blow to the Bank of England’s efforts to curb inflation. In response, today the Bank announced an outsized 50bps interest rate hike, marking its 13th consecutive rise and a full 0.25% over market expectations. The dovish narrative that has accompanied previous hikes has now been comprehensively put hold as the Bank looks to establish its hawkish credibility in the face of the highest inflation in the G7.
“The market is of the view that Bank of England is losing the battle against inflation, and we continue to see further volatility within UK gilt prices. The UK has now had two above expectation inflation releases in a row, data showing a pay growth that is much stronger than expected and investors have priced in a 6% Bank of England base rate being hit before the end of 2023. This is not only bad news for mortgage holders but the UK Government as it looks to service its debt which has just surpassed 100% of GDP for the first time in over 60 years.
“Looking ahead, bond investors are pricing in a further interest rate hike at the August meeting after seven out of nine of the of the Bank of England’s voting members opted for larger 50bps rise today.
Luke Bartholomew, senior economist, abrdn, said: “While some investors had been speculating about the risk of a 50bps increase today, this decision will come as a shock for many in the market.
“The risk for the Bank of England in causing such as surprise is they end up looking panicked and increase uncertainty about the likely future path of interest rates. However, policy makers clearly feel that that the recent run of inflation data has been ugly enough to warrant such a large move to try to keep a lid on inflation expectations.
“It is increasingly difficult to see how the UK avoids a recession as part of the process of bringing inflation down. And today’s large rate increase will probably be seen in retrospect as an important milestone towards that recession.”
Richard Carter, head of fixed interest research at Quilter Cheviot said: “Following yesterday’s shock inflation reading, it has clearly spooked the Bank of England into taking more drastic action than predicted with a 50bps increase in interest rates. Until inflation begins coming down to more palatable levels the Bank of England will continue to put the brakes on the economy and as such the UK once again finds itself staring down the barrel of interest rate rises and economic strife.
“It is perhaps becoming clearer that due to the UK’s more unique set of economic circumstances, recession may be the only option to bring inflation down. While the UK avoided recession at the turn of the year, it does not mean one is not lurking further down the tracks. Clearly interest rates are a blunt tool and are failing to have the desired effect in dampening demand but the BoE will keep using them. The problem the BoE faces is much of this inflation has been driven on the supply side so it is not clear exactly what else the Bank of England can do. We are ultimately stuck in a sort of holding pattern waiting for the data to improve.
“Ultimately, this journey to more normal monetary conditions is going to take much longer than planned and this will unfortunately have consequences for the likes of mortgage holders. Subsequent rate rises are going to stoke these fears further and talk of recession is likely to start honing back into view later on this year.”
Andy Burgess, Fixed Income Investment Specialist, Insight Investment said:
‘With recent inflation data continuing to surprise to the upside, the Bank of England shored up its credibility with an above consensus 50-basis-point rate hike, in recognition that it will take longer for persistent inflationary pressures to subside than previously thought.
‘Not everyone on the Monetary Policy Committee agreed though; two members voted for no change in the belief that falling energy prices would see a reversal of inflationary pressures in the months ahead, and that the full impact of rate hikes already implemented had not yet fully been felt.
‘Although the Bank warned of further tightening ahead, it shied away from using language that would signal a repeat of today’s bold move and confirmed data dependency. The markets’ initial reaction was that “more now means less later”, with UK gilt yields rallying on the announcement.’
Robert Jeffree, Chief Executive of Omnis Investments, comments:
“After May’s hot inflation report, the Bank of England faced a dilemma when it came to its interest rate decision today. They can’t risk letting inflation expectations get higher and the worrisome acceleration of prices in the service sector risks just that, even if goods prices are falling. But after the most rapid increase in interest rates since the late 1980s, millions of people are already facing a remortgaging cliff which has now become even harder to navigate.
Having said that their policy is now more data dependent, the Bank had to deliver a rate increase. A greater step change – 50bp rather than 25bp suggests a more discernible hawkish tilt which is bad news for borrowers and good news for savers.”
Giles Coghlan, Chief Market Analyst consulting for HYCM, said: “The stakes have never been higher for Bank of England policymakers. Yesterday’s news that core inflation has risen to the highest level since John Major was in Downing Street has delivered another blow to the economy, and with headline inflation remaining at 8.7%, a 50bps rise was necessary to avert further policy failure.
“The BoE is unlikely to clearly signpost how high rates will go at this stage, because the recent rapid pricing is disruptive for UK businesses and homeowners. However, investors should not rule out further hikes to come. Despite the stagflation and pain it will cause in the near-term, market expectations now see rates exceeding 6% in early 2024, and the threat of a recession looms more than ever. We have already seen some GBP sell-off, but this will continue if a recession looks increasingly likely.”
Daniele Antonucci, Chief Economist & Macro Strategist, Quintet Private Bank (parent of Brown Shipley) on Bank of England interest rate said: “The Bank of England surprised the market with a bigger than expected rate hike.
The 50 basis-point increase versus 25 expected follows a reacceleration in core inflation, with the latest report showing broad-based price pressures and other data pointing to a tight labour market and wage growth.
This casts doubts on whether the Bank will be able to pause its rate hiking cycle to assess the impact on financial conditions and the real economy, as the Fed did.
We expect yet another rate increase at the next meeting, followed by an additional hike and the subsequent one.
While this further squeezes incomes and puts downward pressure on the housing market, we believe that the Bank has no choice other than engineering extra economic weakness in an attempt to curb what now looks like self-sustaining inflation.”
| Susannah Streeter, head of money and markets, Hargreaves Lansdown said: ‘’ |
