Bank of England hikes UK base rate for twelfth consecutive time to 4.5% – reaction from investment experts

by | May 11, 2023

Bank of England

There’ll be little surprise to wealth managers following today’s announcement from the Bank of England that UK base rates are to increase by 0.25%. Bank rate has risen from the previous rate of 4.25% to a new rate of 4.5%. Most economists, analysts and market watchers have been predicting that the Bank would hike again given the current economic conditions.

This latest move signals the twelfth consecutive time that the Bank’s Monetary Policy Committee (MPC) has hiked bank rate, which now sits at its highest level since 2008.It shows the Bank’s commitment to its aim of reducing inflation back towards it’s 2% target, however it’s the Bank’s latest economic forecast which will be most under scrutiny from investment experts and wealth managers.

Investment experts, economists and wealth managers have been sharing their reaction to today’s news of the latest base rate hike as follows:

Marcus Brookes, chief investment officer at Quilter Investors said:  “With the Bank of England raising interest rates yet again, we continue to ask ourselves ‘is this the end of the hiking cycle?’ Unfortunately for many households and businesses, we simply just do not know yet. While it appears in the US that they are ready to hit the pause button on interest rates, here in the UK we continue to face sky-high inflation, leaving the BoE with a tricky task of knowing when enough is enough on rates.

“However, the rate of inflation is still predicted to drop considerably from here as energy prices have since subsided following Russia’s invasion of Ukraine. This may give the BoE enough cover at its next meeting to press pause and give a little respite, before deciding on the next course of action. So far the UK economy has held up in the face of adversity and the forecast of recession has not yet come to fruition and the BoE is now expecting one not to happen – although for many it will have felt like one. Growth forecasts are picking up, although remain very weak, and given this backdrop, it is perhaps premature to look too far ahead and expect cuts later in the year.

“The economic environment does not necessarily paint a picture of recovery yet, and as the last three years have shown, things can change very quickly. Inflation is proving incredibly stubborn and the Monetary Policy Committee won’t want a policy misstep, so for as long as the economy can handle it, higher rates will remain in place until price rises are under control.”

Commenting on the outlook for SMEs as the BofE raises interest rates yet again, Douglas Grant, Group CEO at Manx Financial Group PLC, said: “Today’s rise in interest rates is yet another blow to businesses struggling to manoeuvre as cashflows are squeezed. Stubbornly high inflation and flatlining GDP data highlighted sluggishness that may be difficult to shake off. Indeed, coupled with the global banking sector showing signs of weakness, SMEs must take this as yet another reminder to review their existing lending structures and ensure they are prepared for further challenges.

Many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, but other businesses that were not as forward-thinking face significant uncertainty. According to our research, more than 20% of SMEs in the UK that sought external financing in the past two years were unable to obtain it. Furthermore, over 25% of SMEs had to halt or postpone certain aspects of their operations due to a lack of funding. The unavailability of finance is exacting a toll on SMEs and the UK economy, impeding growth precisely when it is most needed. The magnitude of the hindered growth is substantial and calls for novel solutions to bridge this funding gap.

Despite the introduction and extension of loan schemes such as RLS Phase 3 last year, there is a need for more proactive measures. Since the economic upheaval caused by the pandemic, we have been advocating for a government-backed loan scheme that focuses on specific sectors, bringing together both traditional and alternative lenders to secure the future of SMEs. As the government looks for ways to revitalise the economy in 2023, the significance of implementing a permanent scheme cannot be underestimated. It could be the crucial factor that determines the survival or failure of many companies and, consequently, the overall economy.”

Giles Coghlan, Chief Market Analyst, consulting for HYCM, said: “Given that annual inflation remains stubbornly above 10%, today’s decision to raise the base rate by 25bps again was almost unanimously anticipated by the markets. With wage growth data coming in hotter than expected a few weeks ago, fears of a wage-price spiral have only grown since March and the economy has not cooled to the extent that Bank of England policymakers will have hoped.

“Right now, core inflation remains sticky at 6.2% year-on-year and investors should expect rates to go higher in the summer even if headline inflation falls sharply, particularly as the markets are now expecting a terminal rate of 4.85%. On a brighter note, the BoE are not forecasting a recession for the UK and have revised GDP up for next year to 0.75% from a prior projected fall of -0.25%.”

Alex Livingstone, Head of Trading – FX & ETFs, Titan Asset Management, said: “The Bank of England decided to raise rates by 0.25% today, taking interest rates to 4.5%. As inflation remains in the double digits, and wages remain hot, the hike comes as little surprise. The widely expected rise in interest rates has recently allowed GBP/USD to surpass 1.26 as yield differentials have narrowed. However, it may not be all plain sailing for Sterling in the coming months as several key risks remain on the table including the US debt ceiling standoff and the deteriorating banking crisis in the US. The materialization of either one of these key risks would spell a capitulation in risk sentiment, allowing for a resurgence in dollar strength.”

Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, said“Today’s decision to raise interest rates to 4.5% was seen as a foregone conclusion as part of efforts to battle price pressures, but the narrative is muddied by the Bank’s previous forecasts that inflation would drop to just 3% by Q1 2024 and 1% by Q1 2025. The question we should be asking is why is the Bank continuing to raise rates when it has already forecasted a mighty fall in inflation by early next year?

The answer lies in the Bank’s as yet unspoken desire to drive real short-term interest rates above zero for the first time since before the financial crisis of 2008/09. We may therefore not yet be at the end of the rate hiking cycle. The MPC may be encouraged not to stop at 4.5%, but to carry on raising the base rate to 4.75% or even 5.00%, creating higher mortgage payments for UK homeowners. Given the Bank’s accompanying Monetary Policy Report reaffirms the Bank’s confidence in sharply falling inflation, there will likely be a desire amongst the Committee’s majority to get additional rate hikes done swiftly.”

Charles White Thomson, CEO at Saxo UK, said: Managing inflation with the blunt weapon that are interest rates has always faced choreography issues, similar to breaking a nut with a sledgehammer. We are now in an economic danger zone, pincered between public enemy number one/ inflation, a 19% increase in food and non-alcoholic beverages which reaffirms the cost of living crisis, and a consumer saddled with outsized debt that was once cheap. The risk for further policy failure is real and the stakes are getting increasingly high.

The conundrum facing the United Kingdom is more than just beating public enemy number one, or inflation, it is about defeating the high tax and low growth loop and the lovers of the status quo or managed decline. In an attempt to remove the politics and infighting, I prefer to continue referring to the UK as a PLC.  My resounding conclusion from the UK PLC’s recent financial statement – or budget – is that the management team are in an unenviable position in that there is little wiggle room for large change. The UK PLC is effectively in a financial straitjacket with constraints including: £2.4 trillion public debt and all the servicing costs this entails, tax to GDP levels approaching record highs or 37.5% and corporation tax moving to 25% from 19% for financial year 2023/24.  Financial outlook statements for generations of UK PLC management have concentrated on the status quo as opposed to a more dramatic plan to seriously kick start growth, confidence, and the all-important upside this brings.

We have an advantage in that UK PLC is the sixth largest global company or economy in the world with all the scale and reach that this brings. This is about a bold and large plan to ensure that we deliver on its full potential and unleash the prosperity that a large part of the UK shareholders want. This would include making Brexit work, tackling the lack of productivity including the regional inequality gap which has entrenched itself since 2008, an overhaul of the corporate and individual tax structure making the UK a highly attractive place to do business, and having an open an honest debate about the sacred cows including the NHS.  The alternative to a bold and wide changing economic plan, which is not purely based on industrially low interest rates and quantitative easing, is continued stagnation and underperformance. This will not be easy, but the alternative is to sell out the next generation which should never be a consideration.”

Luke Bartholomew, senior economist, abrdn said: “There were no surprises in the Bank’s decision to hike rates by 25bps today or in the composition of the vote. The forecasts showed some punchy upward revisions to growth expectations, and the Bank is no longer formally forecasting a recession. We continue to think the combination of the monetary tightening already in the pipeline combined with a sharp US slowdown will see the UK economy experience recession-like conditions for much of the year.

However, with inflation proving more resilient that expected, the Bank has not been able to pause hikes in the way that some policy makers have been calling for. We are still minded to think that today’s hike will be the last of this tightening cycle. But the risks are skewed heavily towards higher rates, and inflation will need to behave itself over the coming months if policy is indeed to remain on hold at these levels.

This means that incoming inflation data will be watched extremely closely over the next few months and may be a source of market volatility especially around currency, with sterling now pricing in more aggressive action from the Bank of England from here compared to other central banks.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown said: ‘’The rate raising marathon has passed yet another milestone as policymakers try and pull back runaway inflation.  The hike of 0.25% pushing the base rate to 4.5% was widely forecast, given that super-hot consumer prices are failing to cool off quickly despite rapid tightening. With wages staying elevated and consumer resilience strong,  the finishing line of rate hikes may still be way off.

Although the Bank expect inflation to drop to 5.1% by the end of this year from 10.1% in March, it’s in contrast to the fall to 3.9% level it predicted in February, with food prices expected to stay stubbornly high. But the Bank is also admitting that the price spiral may prove harder to come down than it previously expected, citing upward risks to forecasts, and that’s why the road still seems wide open for another hike.

Rather than flagging and dropping back into recession, the economy is jogging very slowly onwards. The Bank has tweaked its forecast for growth, estimating it to be around 0.2% for the first half of the year. As consumers relax amid this better-than-expected health check on the economy, the latest data from the ONS indicates they are ploughing through savings and racking up borrowing, with spending on debit and credit cards jumping 11 percentage points last week. This more optimistic attitude risks keeping the fires of inflation smouldering. Consumer goods giants have been able to pass on price hikes to consumers and with appetite to spend staying strong, that looks set to continue. If prices stay elevated the clamour for higher wages is also less likely to quieten, increasing the risks that higher inflation will bed down.

This is all playing on policymakers’ minds, and the uncomfortable truth is that that they need to see higher borrowing costs make life much more painful for companies and consumers, with insolvencies increasing and jobs becoming more precarious, before caution returns and demand drops back.

After softening a little ahead of the announcement sterling jumped back above $1.26 as policymakers consider slogging on with further rate hikes, just as the Federal Reserve appears poised to press pause. This is because US headline inflation has dropped back to less than half the rate its running in the UK. However, although the pound has strengthened significantly since the disastrous days of the Truss administration last September, it remains very weak compared to the level it traded at before the vote for Brexit. This intensifies the inflationary headache for the Bank of England as it makes the cost of imported goods more expensive, fuelling scorching consumer prices.’’

Shane O’Neill, Head of Interest Rates at Validus Risk Management, said: After a busy week for central banks last week, with the Fed likely hitting pause and the ECB pushing ahead with more hikes, we had the Bank of England come to market today. The MPC went with market expectations and hiked by 0.25% in a 7-2 vote, taking the rate to 4.5%. Where the Fed recently omitted a line about future tightening, the BoE did not – if inflation persists, they’ll continue to tighten – the first nod to a BoE adjusting to become more hawkish than their transatlantic counterparts.

The biggest news from today’s release is the changes to projections – inflation projections were increased across the forecast horizon and GDP projections got a major boost, with the BoE now expecting the UK to avoid a recession. Quite the change from the 8 quarters of declining growth projected a matter of months ago. Surprisingly good demand in the economy, lower energy prices and a more resilient labour and housing market is seemingly giving the BoE the confidence required to continue tackling inflation.

From this release there doesn’t appear to be a target rate in mind, but rather we’re looking for a rate which gets the job done on the inflation front. Markets continue to price an additional 50bps of hikes, coming over the next 2-3 meetings – though not a game changing meeting, this definitely errs on the more hawkish side of recent BoE communication and should support the strength seen in GBP against the USD and EUR over recent weeks.”

William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) said “Inflation in the UK has taken longer to fall from its peak than in other economies such as the US and euro-zone, having only fallen by 1.0% since the peak in October 2022. Although some of this is due to one-off factors such as higher energy and food prices in the region, the fact that core inflation, which excludes these, remained flat at 6.2% in March made it easy for the Bank of England to justify another 0.25% interest rate hike.

The latest forecasts from the BoE show another upgrade to growth for this year, bringing it more in line with the ONS’s forecast. This mostly reflects lower gas prices. However, their inflation forecast for this year has gone also risen. This is due to recent data showing wage growth remaining high at 6.6%, indicating that the labour market remains tight enough for the Bank of England to contemplate additional rate hikes in the coming months.

The initial market reaction to the interest rate move was limited as it had already been priced in by investors. Although investors would have taken some comfort from the upgrade to the growth forecast this has been offset by the BoE’s view on inflation. Although the market reaction today has been muted, it is important for advisors to be cognisant that we still expect bond market volatility to be remain high in the coming months especially around inflation data releases.”

Mark Tosetti, Partnerships Director of ONP Group commented: “There is a feeling across the market that interest rates will go down in the second half of the year, and we all hope this is the last of twelve consecutive rises.

If this is the case, it will provide certainty regarding the cost of borrowing in the market, including swap rates. We hope this will in turn drive an increased availability of products to further meet the needs of consumers.We are already starting to see increased demand in the remortgage market in the second half of the year. If competitively priced products become available, consumers might be less inclined to stick with standard variable rates.”

Mike Bell, global market strategist at J.P. Morgan Asset Management said: “The Bank of England is in a tricky position.

By the end of this year 1.4 million fixed rate mortgages will have expired, forcing those households to refinance at much higher rates. Two years ago, households with at least a 25% deposit could fix for about 1.7%. With the cheapest mortgage rates currently at about 4%, when those households refinance many of their mortgage payments will rise by about 35%. This will probably cause most of those households to cut back on their discretionary spending and hence dampen inflation pressures, while increasing the chance of there being a recession.

 So where does the Bank of England go from here? Personally, I think they should now pause. They can always hike rates further later on if needs be to get the job done but if they keep raising rates before the effect of their prior tightening has been felt, they risk going too far and doing more damage to the economy than is required to bring inflation back to target.”

Daniele Antonucci, Chief Economist & Macro Strategist, Quintet Private Bank (parent of Brown Shipley), said: “It’s not surprising that the Bank of England raised interest rates by a quarter-point to 4.5%, the 12th rate increase in a row. The important message is that the Monetary Policy Committee’s statement seems to validate market expectations that, while the key policy rate will rise somewhat further, it will likely peak close to 5 per cent.

The Committee’s forecast indicate that inflation would fall sharply if rates were to follow what’s currently priced in. Of course, if inflationary pressures turned out to be more persistent, further monetary tightening would be needed. With US inflation falling from 9.1 per cent at its peak to 4.9 per cent currently, our view is that the latest Federal Reserve hike will likely be its last of the year and the final one in its rate hiking cycle.

As the UK appears to have a worse inflation problem than the US, the Bank of England looks set to raise rates somewhat more, perhaps once or twice, before pausing for the rest of the year.

Given that the Eurozone seems to have a rather uncertain inflation outlook as well, the European Central Bank may raise for a little longer too, but should also bring its tightening cycle to an end.”

Mike Bell, global market strategist at J.P. Morgan Asset Management said: “The Bank of England is in a tricky position. By the end of this year 1.4 million fixed rate mortgages will have expired, forcing those households to refinance at much higher rates. Two years ago, households with at least a 25% deposit could fix for about 1.7%. With the cheapest mortgage rates currently at about 4%, when those households refinance many of their mortgage payments will rise by about 35%. This will probably cause most of those households to cut back on their discretionary spending and hence dampen inflation pressures, while increasing the chance of there being a recession.

 So where does the Bank of England go from here? Personally, I think they should now pause. They can always hike rates further later on if needs be to get the job done but if they keep raising rates before the effect of their prior tightening has been felt, they risk going too far and doing more damage to the economy than is required to bring inflation back to target.”

Daniele Antonucci, Chief Economist & Macro Strategist, Quintet Private Bank (parent of Brown Shipley), said: “It’s not surprising that the Bank of England raised interest rates by a quarter-point to 4.5%, the 12th rate increase in a row. The important message is that the Monetary Policy Committee’s statement seems to validate market expectations that, while the key policy rate will rise somewhat further, it will likely peak close to 5 per cent.

The Committee’s forecast indicate that inflation would fall sharply if rates were to follow what’s currently priced in.Of course, if inflationary pressures turned out to be more persistent, further monetary tightening would be needed.

With US inflation falling from 9.1 per cent at its peak to 4.9 per cent currently, our view is that the latest Federal Reserve hike will likely be its last of the year and the final one in its rate hiking cycle. As the UK appears to have a worse inflation problem than the US, the Bank of England looks set to raise rates somewhat more, perhaps once or twice, before pausing for the rest of the year.

Given that the Eurozone seems to have a rather uncertain inflation outlook as well, the European Central Bank may raise for a little longer too, but should also bring its tightening cycle to an end.”

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin said: “There was little surprise at the 25-basis point rate increase today by the Bank of England, bringing the UK Bank rate to 4.5%, with two out of the nine committee members voting for no change.

Forward guidance was unchanged in May, meaning the Bank of England is not signalling a pause as some may have hoped. The BoE continues to guide that if there were to be evidence of more persistent inflation pressure, then further tightening in monetary policy will be required. The BoE has little choice but to leave the door open for further rate increases given that inflation is double that of the US and above the pace in the Eurozone.

“On inflation, the BoE expects it to slow to 5.1% by the end of 2023, higher than the 3.9% forecasted in February 2023. This shows the BoE judged that inflation is likely to be more persistent due to the tight labour market, this also means that UK prime minister Rishi Sunak’s pledge to halve inflation this year will just be met.

On a positive note, the BoE’s view of the economic picture has turned materially better, amidst forecasts made earlier this year that the UK would experience a prolonged recession, this no longer appears to be a likely outcome. The combination of upward revisions to inflation forecasts and improved growth outlook is hawkish for monetary policy.

Traders continue to think that the BoE is not done yet, with close to two more rate hikes being priced in by the end of the year. This is likely to deliver more pain to mortgage holders during an ongoing cost-of-living squeeze. Unfortunately, this forms part of the unavoidable costs to bring down inflation by reducing excess demand in the economy.”

James Lynch, Fixed Income investment manager at Aegon Asset Management said: “The BoE raised rates again by 25bp to 4.5% in order to bring CPI inflation down to 2% over the medium term. Inflation was revised higher in 2023 from 4% to 5% and GDP was revised higher from -0.5% to +0.25% in 2023.

 In the press conference, Governor Andrew Bailey reiterates the forward guidance of the previous meeting that they would raise interest rates if they saw signs of persistent inflation. Which means they raised rates today because of persistent inflation? No, they reference that inflation is higher because of food and clothing prices, which meant spot inflation is 0.8% higher than their previous forecast – persistent inflation came more or less in line (services CPI).

 What’s also slightly confusing is that the medium-term inflation was revised lower, not higher. CPI in 2025 is due to be 1%. So, if inflation in the short term moved higher due to food and clothing prices – which is not persistent inflation according to the BoE – and inflation is moving below target in the medium term, why do they keep raising rates?

They are obviously being swayed by the high spot inflation of 10.1% and they clearly put more weight on upside risks to CPI, but it does raise the risks also to a policy error which may result in a greater economic slowdown to come as the lagged effects of previous interest rate hikes work their way through the economy.”

Tommaso Aquilante, Associate Director of Economic Research at Dun & Bradstreet said: “While the UK economy has proven more resilient than expected, inflation is far from tamed. And with both wage and core inflation now at around 6%, the Bank of England is legitimately worried about a wage price spiral. By ensuring price stability, the Bank of England plays a crucial role in the economic system, allowing households and businesses to plan their spending and investments more predictably. Bringing inflation down is the priority.

Yet, even if inflation eased and did not increase further, this year will likely remain tough and data shows that a quarter of business leaders cite weakening consumer demand as the most significant threat. Having a defence strategy here is critical and businesses need to have the knowledge and tools in their armoury to make well informed decisions to remain resilient but also competitive so that they can find innovative ways to serve customers when demand is lower and costs are higher.”

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