Bank of England interest rates held at 5.25%but what does it mean for investment? Investment experts react

by | Nov 2, 2023

As the Fed kept US rates on hold yesterday, today’s announcement from the Bank of England regarding UK base rates had been nervously awaited.

Market watchers had generally been expecting the Bank to keep rates at the current fifteen year high, so today’s announcement did not come as a surprise that the MPC had decided to keep rates at 5.25%.

With the UK having managed to avoid going into recession territory so far, the MPC’s task of trying to balance the need to bring inflation back to target with the impact of time lags and the slow down in economic growth, is certainly a tricky one.

Markets have been warned by the Bank to expect that interest rates will have to be kept higher for longer, something which has clear implications for wealth managers.

Investment experts and economists have been sharing their reaction to the latest interest rate decision with Wealth DFM magazine as follows:

Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services comments:

“The Bank of England’s Monetary Policy Committee (MPC) has anchored the UK base rate at 5.25% for the second meeting in a row, feeding expectations that the ebbs and flows of rate hikes are behind us.

Soft economic activity and inflationary pressures persist, but the fact that these are no worse than forecast contributed to today’s conclusion to hold the rate steady. The rise in longer dated government bond yields, in large part the consequence of global factors, has served to tighten financial conditions and done a share of the MPC’s work for it.

The question going forward is how long this standstill will last for – with financial markets expecting it to be a considerable period of smooth sailing. The door for future rate hikes still sits ajar, and the MPC will likely remain vigilant for further fluctuations and risks in the months ahead.”

Jonathan Sparks, CIO – UK and Channel Islands – HSBC Global Private Banking & Wealth comments:

“We’re not surprised that Bank of England has decided to hold interest rates at 5.25% for a second consecutive time as the BoE is in no mood for rocking the boat and the market is expecting this rate to be held until at least the middle of 2024. In our current forecast we doubt the BoE will even cut until 2025. 

Looking ahead, the world is in shock, and uncertainty is high as events in the Middle East continue to unfold. If the conflict were to escalate, the BoE’s response would vary depending on whether they saw inflation of growth as the greater risks. Further reason for the BoE to pause and monitor the potential risks.

Additionally, elevated bonds yields  have already done some of the heavy lifting for central banks in the second half of this year and with inflation set to fall considerably from here, it makes sense to take stock and monitor the spread of higher rates through the economy.

At the current level, we continue to focus on quality bonds, especially in this uncertain global context. We have extended our duration preference for government bonds of seven-to-ten-year maturities, and we maintain a medium duration (five to seven years) for investment grade corporate bonds.

Our focus remains on quality – in equities and in fixed income.”

Commenting on the UK holding interest rates, Charles White Thomson, CEO at Saxo UK, said:

“The Central Bank ‘synchronized swimming’ interest rate decision teams have been out in full force. The UK, US and Europe all in unison – rates on hold but alert and decisive to hike again if inflation starts to regroup and go again. An important part of their analysis is based on the power of interest rate lag and its cooling effect which realistically is part judgement and part luck.  

Consensus and synchronisation are concerning, and we should remind ourselves that not all inflations are created the same and neither are individual economies. Through this lens, the US are better positioned with Europe and the UK lagging behind as they are hampered by anaemic economic growth. In the UK’s case, it also has to deal with a virulent variation of inflation.  These are challenging times for the Bank of England – made even more difficult by a highly stressed UK consumer which is where the recession is.”

Derrick Dunne, CEO of YOU Asset Management commented:

“All eyes were trained on the US this morning, as we waited for the Federal Reserve’s decision on interest rates Stateside. The fact that it held at a 22-year high for a second consecutive month, made the Bank of England’s decision this lunchtime pretty much a foregone conclusion. But not a certainty. It is notable that Federal Reserve Chairman Jerome Powell did not rule out a further hike next month, this may yet be a temporary reprieve as they wait and see if they have done enough to bring inflation back under control.

Inflation is certainly slowing Stateside, prompting Powell for the first time to talk about balancing the risk of not going far enough on interest rates with the risk of overdoing it and bringing about a credit squeeze.

While the economies of the UK, the European Union and the US experienced the same kind of shocks that brought about rampant inflation, they are not experiencing the same pace of recovery. We have yet to see the same consumer spending confidence they have in the US. And the Monetary Policy Committee is further hampered by poor labour data. In the fight with inflation, indiscriminately throwing interest rate hike punches one after the other, may well have landed a knock-out blow. We’ll just have to wait and see whether it was to inflation or the economy.”

Edward Park, Chief Investment Officer at Brooks Macdonald, comments on the Bank of England’s rate decision: 
“The Bank of England maintained its interest rate at 5.25% today, mirroring the Federal Reserve’s pause decision from yesterday. This implies that the central bank forecasts the current level of UK interest rates will be sufficient to continue to bring down the UK’s still high inflation. 

The question is now how long the Bank of England will stay at its current rate. On the one hand, it wants to keep inflation under control. On the other hand, it’s staring down sluggish economic growth and a weakening jobs market, both of which were explicitly called out in the Bank’s statement.

Given the delayed impact of monetary policy and the cloudy economic outlook, the Bank has remained flexible in its approach. For now, the Bank is observing the impact of its prior rate adjustments before making another move. It’s significant to mention that the decision to hold the rate was split, with 3 members of the Bank of England supporting a rate hike. Should inflation remain elevated the hawks at the Bank of England are likely to attract additional support from voting members concerned around price pressures. The Bank also downgraded its expectations for UK economic growth, expecting stagnation in Q3 2023 followed by the smallest of expansions in Q4.”

George Lagarias, Chief Economist at Mazars comments: 

“Another day, another pause and another fight at the BoE. As expected, the UK central bank retained its key interest rate for the second time in a row, mirroring the Fed’s decision yesterday. It is clear that the Bank’s board members are looking outside the window at an economy that has barely grown in the past year. Unlike the US, the holder of the world’s reserve currency, the UK can’t fiscally support its economy without risking a backlash in the bond market, similar to last September’s. Further hiking would risk tipping a barely growing economy into a recession. External members seem to disagree, possibly adhering to stricter economic dogma. However, the Bank’s intention is now clear, and the scale has been tipped for growth rather than for controlling inflation.” 

Commenting on BoE’s Interest Rate Decision, Tom Hopkins, Senior Portfolio Manager at BRI Wealth Management, said:

“The Bank of England have held interest rates at 5.25% in the latest meeting extending the pause which began in September. UK Rates remain at 15-year highs. The vote was not unanimous, whilst the majority (six) voted to keep rates unchanged, three MPC members voted for another rate hike.  Today’s decision follows suit of other major central banks that have already held borrowing costs in recent days.  The problem which the Bank of England will be keeping a close eye on is that inflation in the UK is still running higher than other advanced economies. Inflation is expected to fall in October, however its likely it’ll still be higher than the eurozone. 

Markets have generally taken this pause from both the ECB, FED and now Bank of England positively as markets take optimism that the peak of rates has been reached, however it does also mean that monetary tightening is having an impact on the economy, even if this is not yet really apparent from the latest data. In addition, the “higher for longer” narrative could lose momentum over the next few months if the economic data deteriorates. ‘’

Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) on Bank of England interest rate decision comments:

“That the Bank of England didn’t increase interest rates today is in line with market expectations until the end of next year, which show a gradual decline in rates in the outer years of the projection horizon.

One risk remains wage growth, which has so far remained high. Inflation remains elevated too, though the Monetary Policy Committee expects it will continue to moderate.

That said, whether this is going happen within the timeframe of the economic projections remains to be seen.

We think the near-term outlook is consistent with rates at the current or perhaps slightly higher level rather than cuts.

The important point is that there continue to be signs of some impact of tighter monetary policy on the job market and the broader economy. This is why we think we’re close to a long plateau in interest rates.

Our tactical 12-month view remains cautious. We’ve invested in high-quality bonds – especially US Treasuries – over riskier equity markets and high-yield bonds. We expect central bank rates in developed markets to be close to or at the peak, but we don’t see rate cuts in the near term. 

Building on our position in US government bonds, we have recently decided to add longer-dated UK government bonds. Yields are at historically attractive levels as we approach the peak in interest rates.

As economic growth and inflation continue to slow, bond yields will fall and bond prices will increase, making it an opportune moment to lock in a decent yield for a reasonably low risk.

Conversely, in our view, the additional yield of lower-quality bonds seems too small to take the extra risk, especially as markets haven’t fully dealt with the impact of past interest rate hikes, and so default rates may pick up more than expected.

We’ve invested in low-volatility equities in the US and Europe. Relative to our long-term allocation, we’re also positioned with a lesser weight to US equities (slightly) and Eurozone equities (somewhat more markedly).

Furthermore, our single-line portfolio holdings remain biased towards investments which we believe demonstrate solid long-term growth prospects, strong balance sheets and attractive valuations. These attributes can serve as a buffer in the event of a reversal in market sentiment.”

Georgina Taylor, Head of Multi Asset Strategies UK at Invesco comments on this afternoon’s decision to hold interest rates at 5.25%:

“In our view the Bank of England could be the first major Central Bank to cut rates ahead of the Fed and the ECB. UK economic data are softening more quickly than in the US, and the BoE has a dual mandate – targeting growth and inflation – unlike the ECB. 

UK Inflation is falling albeit is still above target, slack is building in the labour market, and some indicators such as insolvencies are showing very worrying signs of an economy coming under meaningful pressure. Those signals support the idea that, at the very least, peak rates have been reached for this cycle. The UK economy is more sensitive to interest rates than the US given the structure of the housing market which comprises a greater proportion of shorter-term and variable rate mortgages. Therefore, cutting interest rates in the UK should feed more quickly to improved consumer and corporate confidence.

We cannot discount entirely the risk that the BoE might be slow to reverse its current course given still elevated inflation and the split in the vote today shows the debate within the committee. The Committee is thus at least cognisant of the need to navigate between Central Bank credibility in the face of higher inflation and the economic risks that are building in the system. Some more hawkish members of the MPC that are erring on the side of over-tightening, believe monetary policy can respond swiftly further down the line should the economy significantly deteriorate, and thus believe it is prudent to keep policy tight until it is clearer that inflationary pressures have subsided. The doves on the committee have a greater focus on the flexible inflation mandate of the BoE and see economic weakness as a medium-term threat that should be addressed. 

This debate will keep the market guessing on the policy over the coming months but in the face of a slowing economy and reaching peak rates, we believe the coos from the doves will get louder and UK Gilts are now an attractive addition to our multi asset portfolios.”

Luke Bartholomew, senior economist, abrdn, said:

“No surprises today with the Bank of England, with interest rates kept on hold as many investors had expected. The Bank is weighing up the conflicting forces of a deteriorating growth environment with still elevated inflation. Keeping policy unchanged makes sense in that context, as the BoE tries to gauge the impact of its previous monetary tightening and the wider increase in global bond yields. 

Bank communication suggests it is too early to be discussing interest rate cuts and that’s true for now. But we think the debate will increasingly move in that direction, with the most likely next move in interest rates down rather than up. 

However, any cuts will probably have to wait until around the middle of next year, with inflation much lower partly due to the recession the economy seems to be heading into. 

For now, UK bond yields will likely be buffeted by movements in the US bond market, which has been particularly volatile recently.”

Ed Hutchings, Head of Rates at Aviva Investors comments:

“With no change but close to 0.75% of cuts priced for 2024, the BoE seems keen to push back on markets getting carried away with cuts. With the lagged effects of past interest rate hikes still to feed through to the economy, weaker growth should well be expected going forward. This should largely be supportive for the currency, but elsewhere, the direction of travel on gilt yields in the near-term is more unclear. Medium-term however, with weaker growth and past hikes yet to feed through, we are close to all but done with interest rate hikes, which is ultimately supportive for gilts.”

Fredrik Repton, senior portfolio manager with the global fixed income and currency management teams at Neuberger Berman comments:

“The Bank of England kept rates unchanged at 5.25% at today’s meeting. The vote was 6-3 for a hold where three members voted to hike rates to 5.5%. It is likely that the forecast adjustment higher in inflation for 2024 and 2025 had some influence in their decision. However, the growth forecast profile was adjusted lower for H2 2023 and 2024, in line with the weaker data that we have been seeing since the end of the summer.

The statement echoed Fed chairman Powell’s remarks from last night that the central bank is waiting to see if more hikes are needed to ease inflationary pressures and that it is premature to be thinking about rate cuts. Having said that, we believe that this is largely posturing to ensure that market participants and the real economy do not expect the Bank of England’s next move to definitely be a rate cut. In our view, the Bank of England has reached terminal rate. The growth profile is now more in line with our expectations and suggests view that rates are sufficiently restrictive. We maintain an overweight in gilts and an underweight in the British pound.”

James Lynch, fixed income investment manager at Aegon Asset Management, says:

“Bank of England have kept policy rates on hold at 5.25% for the second month in a row, with a 6-3 MPC split, 6 voting for unchanged rates and 3 for a hike.

 This was expected by the market with little priced for anything other than unchanged policy rates. The reality is inflation has fallen fast from 11.1% to 6.7% and should be in the 4% area into the end of year, at the same time we are seeing economic activity indicators showing signs of concern. The BoE are getting comfort from indicators such as the low PMIs and the softening labour market that the rise in interest rates we have seen to 5.25% is showing that the policy rate is sufficiently restrictive.

 I would expect the chances of getting another interest rate hike in this cycle is very low as the momentum in the economy and future indicators point to lower activity while inflation is falling. The question should now be when will the BoE cut and how bad the outlook needs to be in order for the guidance from the BoE to change away from the current ‘pause’.”

Katrin Löhken, DWS Economist, United Kingdom and Japan comments:

“The Bank of England (BoE) joins the ranks of central banks that, after a tight course of interest rate hikes, are taking a wait-and-see approach to assess how the high interest rate level eats through the real economy. It left its key interest rate unchanged at 5.25 per cent today. However, not least the vote of the Monetary Policy Committee (six voted for constant interest rates, but three still favored another rate hike) shows the high level of uncertainty about the outlook for the real economy.

In addition, there are quality problems with the labor market data in focus, so that the central bank can rely on the data less than usual. Nevertheless, the central bank minutes show that the BoE continues to believe that inflation and wage dynamics will weaken in the coming months. The risk, however, is that this slowdown will not be permanent, and that excessive wage increases in particular could lead to second-round effects. This would jeopardize the permanent reduction of the inflation rate to the target level of 2 per cent. Therefore, the BoE has maintained its hawkish tone at this meeting and signaled its intention to keep interest rates at a high level for a longer period of time.”

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