Bank of England interest rates – Investment experts and economists share their views

by | Mar 23, 2023

Bank of England

After yesterday’s shock rise in the rate of UK CPI inflation to 10.4% and the US Federal Reserve Bank (The Fed) rate hike of 0.25% yesterday, today’s base rate announcement of the decision from the Bank of England’s MPC is clearly a key decision for the UK economy – and especially so for wealth managers’ investment decisions and asset allocation strategies. 

As well as the ongoing battle against inflation, the recent banking stresses stemming from the collapse of a few smaller US banks as well as the ‘arranged marriage’ between UBS and Credit Suisse over the weekend, all mean that the members of the MPC have had much to consider as they weighed up this month’s rate decision. The impact sustained rate hikes has had major impact on banks – as well as on consumers around the world all collude to mean that today’s decision is likely to stoke further fears of financial turmoil which underpins the new stresses in the banking system which are spooking markets as the liquidity crunch bites.

Following the Bank of England’s announcement at midday today, investment experts and economists have been sharing their thoughts and opinions with Wealth DFM as follows:

 

Karen Ward, chief market strategist EMEA at J.P. Morgan Asset Management (JPMAM) said:

“The Bank of England’s Monetary Policy Committee was right to raise interest rates by 25bps at its meeting today. It is possible that recent concerns in the global banking sector will serve to tighten credit conditions, but that is not guaranteed. As with the ECB last week and Fed last night, the Bank of England acted on the information it had today which is that the economy is still resilient, inflation is uncomfortably high and broadening, and wage growth is at a level that is inconsistent with a 2% inflation target.

“We are concerned that the Bank will find itself outside of the central bank herd in the second half of the year. This is because the persistence of inflation appears more worrying in the UK than elsewhere, reflecting the fact that the combination of Brexit, the pandemic and an energy crisis appears to have done more lasting damage to the supply side of the economy.

“Given the uncertainties, the Bank should refrain from offering guidance about the future of policy rates. Over the past year they have frequently signalled a view that they expect interest rates to peak at current levels but then the inflation data has proved otherwise. They should leave themselves degrees of freedom by merely stating they will do whatever it takes to bring inflation down.”

 

Dan Howe, Head of Investment Trusts at Janus Henderson Investors, said:

“A further uptick in interest rates continues to muddy the waters for UK consumers. With scant few savings products reflecting the base rate, those with money in the bank will feel little change to the speed at which inflation is eating away at their savings. More hard hit will be those households up and down the UK either who have, or are hoping to get, mortgages as their finances will be further pressurised by this increase.

“The importance of making your money work both harder and smarter has rarely been as great. Step one is finding the best savings product for an emergency fund. But beyond that, it’s important that additional savings are properly invested in a diverse portfolio. This can deliver much welcomed inflation protection as well as help to build a more robust financial future.

“A popular option is income investing, which, crucially, is able to help investors at all life stages. Vehicles that pay dividends can be a great help to those whose budgets are being squeezed right now by providing an extra stream of income. And for those who wish to benefit from further compounding, those dividends can be reinvested too.”

 

Richard Carter, head of fixed interest research at Quilter Cheviot said:

“After Tuesday’s inflation figure, the Bank of England had no choice really but to raise interest rates today. It will have been somewhat spooked by inflation rising, and it makes the prediction that inflation will stand at just 2.9% by the end of the year even more difficult to achieve. However, the contagion in the banking system appears to have been contained for now, giving it some cover to raise rates today without being overly concerned it will tip the balance for any banks that are under duress. Furthermore, the UK banking system has much more stringent regulation and capital adequacy rules so the system should be able to handle this rate rise.

“Going forward, it will be hoped this will be the final rate hike before a period of pause to assess how the rate hikes are taking effect. Prior to the surprise inflation stat, there was growing divergence in the Monetary Policy Committee about the most appropriate way forward with rates, particularly given the economy is expected to contract this year though miss falling into recession. Ultimately, inflation continues to be the key driver of interest rates and this will continue to be the case unless the recent banking issues transforms into a full-blown crisis. Inflation is proving sticky so it is hard to say if this is the end, but consumers up and down the country will be hoping for some relief when the Bank of England sets rates again in May.”

 

Giles Coghlan, Chief Market Analyst, consulting for HYCM, said:

“With regulators battling to avert banking contagion and inflation coming in hotter than expected, the stakes couldn’t have been higher at today’s Monetary Policy Committee meeting. If it were not for yesterday’s surprise CPI reading, the Bank of England’s decision to hike rates today would have been finely balanced – even in the wake of the SVB-Credit Suisse crises, there was a clear argument for holding rates at 4%. However, with inflation proving stickier than expected in the UK, keeping the hammer down on spiralling prices remains the priority and today’s 25bps hike should help to cement disinflationary forces.

“Two of the nine members voted to keep rates unchanged, but the BoE stated that, despite the recent uptick in inflation, they remain confident that it will come down sharply. Today’s decision could push the pound higher as it revised growth marginally higher for Q2 this year, as well as signalling that the central bank could be readying itself to press pause on its hiking cycle. As such, it may take more of a ‘wait and see’ approach when policymakers next convene in May.”

 

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

“The Bank of England has been all but forced to increase rates by yesterday’s surprising inflation data. The timing of this hike is inconvenient, to say the least, given the current uncertainties in the banking sector and because the Bank would ideally be nearing the end of its tightening cycle by now. Instead, with the worst inflation in the G7 and uncertainty over the current trend, the Bank may still be some distance away from pausing its rate hikes, unlike its American peer who signalled this week that the end of monetary tightening is on the horizon. 

“The turmoil within the banking system may be keeping central bankers awake at night, but their primary mandate is to ensure price stability, which is unfortunately not a current feature of the UK economy. The Bank has been jolted into action, they have had to adjust any plans for a gentle easing of hikes leading to an eventual pause. With the UK precariously teetering on the edge of recession, this latest jump in inflation risks pushing the country further into the depths of an economic downturn.”

 

Susannah Streeter, head of money and markets, Hargreaves Lansdown, said:

“A banking curve ball has been thrown into the Bank of England’s already tricky juggling act, but for now the eye of policymakers is still firmly trained on catching inflation and bringing it under control. The hotter than expected temperature of consumer prices in February, and the tight labour market are cause for concern, amid worries inflation could still become embedded in the economy.

“It wasn’t a unanimous decision though, with the Monetary Policy Committee split on what to do, given how rapidly the sands have been shifting. The pound has climbed higher above $1.23 adding to gains already made amid widespread expectations of this rate rise.”

“The knock-on effects of the banking scare are still hard to determine, and with lending criteria expected to be tightened and loans set to be harder to come by, a forecast deterioration in financial conditions is likely to be the equivalent to further interest rate rises in the months to come. Inflation was already expected to drop sharply by the end of the year to around 2.9% and if consumers and companies find it harder to access credit, it’s likely to be a fresh disinflationary force. So, in May policymakers are expected to press pause on rate hikes, as the lag effect of tightening across the economy comes into play.”

 

Jatin Ondhia, CEO of Shojin, said:

“Today’s interest rate decision was on a knife-edge. The stakes were so high with elevated tensions across the US and European banking systems and yesterday’s shock rise in inflation – this all undoubtedly turned the heat up on the Bank of England, and it is telling that it opted to stick to its tough line of hiking interest rates to curb the cost-of-living crisis.

“Those hoping for a respite from tighter monetary policy may have a longer wait ahead than anticipated, as policymakers grapple with the dual task of confronting inflation and easing bank jitters. As such, in the current climate, investors must stay focused on their individual goals, assess the risk exposure they are comfortable with, and ensure they are using all the tools and techniques at their disposal to protect their wealth against uncertainty and changing market conditions. If they do, they could find new opportunities amid all the turbulence. From diversification to tax efficiency, agility will be the watchword as the foggy conditions persist.”

 

Luke Bartholomew, senior economist at abrdn, said:

“The nasty upside surprise in the February inflation data meant that that by the time the Bank’s decision was announced, it was widely expected by markets despite the recent banking sector troubles. This is exactly how the Bank’s conditional guidance is meant to work; with expectations for interest rates dynamically adapting to the inflation data. As such, wage growth and inflation figures over the next month will be crucial for investors in shaping expectations for what the Bank does to interest rates in May.

“Our expectation is that rates have reached their peak for this cycle as the lagged effects of past monetary tightening and financial market volatility start to weigh heavily on the economy. However, there is still a significant risk of one final rate increase if inflation proves to be a bit stickier in coming months.”

 

William Marshall, Chief Investment Officer at Hymans Robertson Investment Services (HRIS) said:

The fragility seen in the banking sector over the past couple of weeks had created some uncertainty for the BoE going into today’s meeting. However, it is now clear that yesterday’s inflation data, which showed an unexpected increase to 10.4%, has refocused the BoE’s attention on inflation.

“In this respect, the labour market remains the key issue for the BoE’s outlook on inflation. The latest employment data showed initial signs of an easing labour market as wage data fell. Nevertheless, it remains at near record levels of tightness, with low unemployment, meaning the risk of a cost-wage spiral is still high.

The unknown consequences of potential banking sector fragility increases the uncertainty regarding the future path of interest rates. The BoE is trying to avoid being stuck between a rock and a hard place, by continuing to focus their attention on bringing inflation down without causing additional undue stress in the banking sector. Investors should manage interest rate risk carefully during these periods of high bond price volatility.”

 

Robert Dishner, senior portfolio manager at Neuberger Berman, said:

“Mixed message from the Bank of England which hiked by 25bps as expected.  This was a 7-2 decision.  While mildly hawkish on the surface as they note better growth forecasts as a result of the budget and external environment, there are dovish elements such as expecting a significant fall in inflation in 2Q 2023 to rate lower than anticipated in the February Report.

“They are making this forecast despite February CPI being 0.6% higher than expected. There was no forward guidance on rates but their forecasts, if true, would note the end of the cycle could be approaching soon.

“However they were surprised in February and leave themselves open to further surprises should inflation remain more resilient and benefits from the Energy Price Guarantee get offset by other core goods and services costs. There is a new round of forecasts by the bank in May that could them the confidence for any major decisions.”

 

Daniele Antonucci, Chief Economist & Macro Strategist at Quintet Private Bank (parent of Brown Shipley), said:

“The Bank of England raising the Bank Rate by 25 bps today is hardly surprising. After all, inflationary pressures remain strong, and probably stronger than expected, as shown by yesterday’s upside surprise to March inflation.

“Looking ahead, the more restrictive credit and financing conditions that are likely to come through from the cumulative policy tightening should further squeeze incomes. This is likely turn into a stronger disinflationary impulse over time. In turn, weaker economy activity across consumers and firms should help curb wage growth and the labour market.

“Even though it’s not clear yet whether all this can bring inflation back to target within the Bank’s forecast horizon, risks for a pause are finely balanced in light of possible external spill overs of financial instability to the UK.”

 

James Lynch, Fixed Income investment manager at Aegon Asset Management, said:

“Today we saw another 25bps from the Monetary Policy Committee to take the Bank of England’s policy rate up to 4.25%, coming right off the back of the US raising interest rates to 5%. The Bank sticks to the same forward guidance as previously stated, but the MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.

“So the Bank maintains that if its base case prevails then no more hikes will be necessary, but it will do more if needed. Of course, what is persistently inflationary now feels slightly more subjective, and it could use any data it pretty much wishes to justify hiking or not. It was interesting Silicon Valley Bank was mentioned four times in the minutes. Even though it acknowledged the soundness of the UK banking sector, there is sense that it will now be looking for any second-round effects on the outlook for growth and inflation.”

“The Bank of England (BOE) hiked rates by 25bps to 4.25% as it expects inflation will decline substantially for the remainder of this year. We anticipate that this is the last rate hike from the BOE in this cycle unless inflation reaccelerates from here, which is seen as unlikely. 

“This combined with many other global central banks nearing the end of their respective hiking cycles means that investors may look to increase the duration of their fixed income portfolios in the coming months to prepare for a stable central bank environment and markets looking ahead to when rate cuts will start. We anticipate this is still some time off in many markets, but believe the BOE will be one of the first major central banks to cut rates in the coming year.”

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