Bank of England MPC hikes UK base rate to 14 year high – investment experts react

by | Feb 2, 2023

Bank of England

Today, the Bank of England has announced its Monetary Policy Committee’s (MPC) decision to hike UK rates – for the tenth month in a row. This month base rate is up by 0.5% to 4% with a 7/2 split in the MPC votes. It’s all part of the Bank’s quest to bring inflation closer to its 2% target. Today’s hike puts UK rates at the highest level since the Autumn of 2008 and adds more pressure to consumers and businesses struggling with rising costs. 

Experts had largely been expecting the Bank of England to announce a 0.5% base rate hike – but it’s the accompanying quarterly report which is also likely to attract attention.

But what does the new 4% base rate mean for the world of investment? Investment experts having been sharing their reactions with Wealth DFM as follows:

Commenting on today’s moves by both the BoE and the ECB, Edward Park, Chief Investment Officer at Brooks Macdonald said “Today, the Bank of England and ECB hiked rates by 50bps, in line with expectations, but their narratives were quite distinct. While the BoE raised rates by 0.5%, two members dissented, backing a smaller move. Within Threadneedle Street, there is a growing feeling that the UK economy will struggle with the cumulative impact of interest rates, and for that reason, bond markets expect this to be the last outsized hike before a downshift to 25bps and a pause over the summer.”

“Before today’s meeting, European bond markets were volatile as investors tried to reconcile better data, falling inflation, and lower energy prices with a hawkish central bank. The market had priced in a 50bp hike and a good chance of another in March, but the ECB’s terminal rate is expected to be only 3.25%, much lower than the BoE and the Fed. The ECB is expected to maintain its hawkish narrative, as they are further from restrictive territory than the US and UK, who have already raised interest rates.

“With this week’s central bank meetings now done, investors will now be myopically focused on inflation data in the coming weeks. In the US, they will also be looking for signs of shrinking wage price inflation, which is an important gauge for the Fed. The speed at which inflation fades in the US, Eurozone, and UK will drive financial markets for the rest of 2023.”

Marcus Brookes, chief investment officer at Quilter Investors, points to some green shoots of positivity emerging as he comments: “The Bank of England can only wish to be in the same position as the Federal Reserve today and begin slowing the pace of interest rate rises. Today’s 50bps rise in rates is the latest in the fight against inflation, a fight that is dragging on longer than many would like. However, it is beginning to see some green shoots of positivity, with growth forecasts upgraded slightly and inflation coming down faster than previously expected. It continues to say inflation will drive policy decision, but the data is looking encouraging.

“Following the IMF’s prediction that the UK will be the only ‘advanced economy’ to contract this year and data painting a more positive picture, calls for a pause or pivot from the Bank will only grow louder in order to prevent a deeper economic malaise. Indeed, members of the Monetary Policy Committee are beginning to sense that it cannot go too much further, particularly as the cost of living crisis continues to hit households hard. Energy prices are beginning to come down too and there are glimmers of light that we may be at the end of this.

“But with inflation still so stubbornly high, the Bank of England is keen to reinforce that the job is far from done. It may be the Bank of England is happy to allow a shallow, but prolonged, recession take place in order to tame inflation. It is a tricky balancing act, but one where investors must remain patient and diversified. The path of inflation and interest rates is still uncertain. Calling this the beginning of the end of rate hikes still feels a little premature.”

Good news is bad news for the Bank of England – according to Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services as he comments: 

“The Bank has raised its base rate by 0.5 percentage points to 4% in its continued ‘forceful’ approach to inflation. More noteworthy is the corresponding Monetary Policy Report, which has revealed that the Bank now expects a shorter and shallower recession – a far cry from the rather dire predictions of only a few weeks ago. 

“Yet for the Bank of England and the MPC, this good news is a wolf in sheep’s clothing. The economy’s unexpected resilience is keeping the inflationary fuel flowing, putting more pressure on the Bank to raise rates in its attempts to stem the flow. With the Bank’s upward revisions, the MPC may have to do the work they had hoped a lacklustre economy would achieve on its own. 

“The markets are eager for the Bank to signal it is close to, or at, its peak rate. When the Bank does signal that its rate-rising work is done, it will likely do so couched in flexibility, as the Bank of Canada has done so. There is a distinct feeling of senior officials copying each others’ homework, with 4 of the 5 central banks in G7 countries standing to behave similarly: rapid rate rises, then announcing a pause. 

 “Yet this may be premature given the economy’s surprising strength, the still-high core inflation, and continued strong wage growth. The Bank still has its work cut out to turn off the inflationary taps.” 

Mike Coop, Chief Investment Officer UK, Morningstar Investment Management said: 

“While the highest point of inflation is likely behind us, today’s rate rise shows that the year ahead will be a difficult one with the unusual cocktail of high inflation, rising rates and recession.  Inflation outlook can change quickly and investors need to prepare portfolios for a range of inflation scenarios.  The good news is that at current yields bonds are less sensitive to further rate rises, recession is cooling demand led inflationary pressures and gas prices have fallen sharply.  With China removing its COVID restrictions this should further ease supply bottlenecks though it will add to demand for energy and growth intensive commodities. The recent rally in markets has been part fuelled by expectations of improved inflation so there is now greater scope for disappointment should inflationary pressures re-emerge.  Investors are best served by maintaining a diversified portfolio, avoiding speculative assets less likely to survive in a higher interest rate and weaker growth environment and favouring better value opportunities when bouts of pessimism occur.”

Garry White, Chief Investment Commentator at Charles Stanley says: “The Bank of England has an arguably more difficult job than the European Central Bank or the Federal Reserve. Inflation remains high at 9.2% and components such as services show no signs of slowing, while the labour market remains very tight. However, we may see some shedding of Christmas holiday service workers in the next few months, which would be helpful for Bank of England policymakers. The UK’s economic outlook is one of the worst in the developed world, with the IMF recently forecasting that the UK economy will contract by 0.6% this year, reflecting tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.
“The central bank’s Monetary Policy Committee (MPC) must navigate high inflation and a tight labour market, alongside poor economic growth forecasts. This carries many risks – and a deep recession could be harder to avoid in the UK than elsewhere. That’s probably why two members of the MPC vote to keep rates at 3.5% with no increase. Thankfully, inflation is likely to have peaked and, with rates likely to travel further into restrictive territory, inflation should begin to fall towards the 2% target over the next year and beyond. However, we see this as a target that is difficult to hit – and relatively high inflation will still be a feature through 2023.”

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

“The decision by the Bank of England to raise interest rates a further 50bp might appear puzzling given the extent to which growth in the UK is already weakening. Indeed, the latest set of forecasts released by the IMF showed that the UK is the only major economy expected to shrink this year. Why then would the Bank of England want to slow the economy even further?

“The problem is that the UK’s ability to supply goods and services appears to be suffering more acutely than our demand for those goods and services. And hence, inflation remains a problem.

“This supply problem is most visible in the labour market. Roughly half a million people left the workforce in the pandemic citing long-term sickness and may therefore not return in the short-term. Vacancies have moderated slightly but still far outstrip the number of unemployed, and wage growth is climbing. Even though headline inflation is likely to fall in the coming months, on the back of stable energy prices, we do not expect core inflation to weaken materially as wages continue to put upward pressure on costs and final prices.

“At times like these, the Bank has to make the ‘unpopular’ choice. I believe they were right to raise by 50bp today and expect rates to need to increase further, to at least 4.5%, to realign demand and supply and finally tame inflation back towards 2%.”

George Lagarias, Chief Economist at Mazars comments: “As expected, the Bank of England performed another double rate hike raising the basic interest rate to 4%. Like the Fed, the UK central bank has reiterated that it prioritises fighting inflation over all other concerns. Consumers continue to face increasing pressures from all sides. Persistent inflation and higher rates which have begun to translate into much higher mortgage payments will continue to eat into real disposable incomes in the coming months. The Bank’s push to maintain lower consumption will eventually hit margins and prevent companies from giving higher wages, adding to consumer stress. Meanwhile, the government is not able to alleviate this cost-of-living crisis as it walks a fiscal tightrope, for fear of destabilising markets again like it did in September. We believe that until inflation is materially down, the next few months could be some of the most difficult for consumers in recent years.”

Daniele Antonucci, Chief Economist, Quintet Private Bank (parent of Brown Shipley) on the Bank of England Interest Rate decision “The important thing is that the Monetary Policy Committee indicated that future policy decisions would depend on incoming data. The statement reads as somewhat dovish as the Committee is no longer saying that it could act forcefully going forward. Further rate increases would only be needed if there were to be evidence of more persistent inflationary pressures. There’s still some risk that the Bank could go for further interest rate rises if inflation news were unfavourable. After all, the Committee still sees risks to the inflation outlook as skewed to the upside. That said, today’s decision raises the possibility that the Bank rate may have already peaked or be close to peaking, undershooting the 4.5% level priced in by financial markets prior to this announcement.”

Fredrik Repton, Portfolio Manager with the Global Fixed Income and Currency Management teams at Neuberger Berman says:

“Given the sentiment post the Fed meeting yesterday, the Bank of England statement risks reading slightly on the hawkish side but it indicates a central bank that is cautious and looking for more data to direct them on future policy action. On the one hand, the labour market is stronger than they had expected and they have revised up forecasts for the economy as a whole. On the other hand, the Bank of England now expects inflation to drop markedly due the base effects in energy prices. Thus, it has removed the reference to forceful with regards to increasing interest rates and this is perhaps the biggest takeaway before the press conference as market participants reads this as dovish.”

John Leiper, Chief Investment Officer at Titan Asset Management comments” Looking forward, the bank faces a delicate balancing act between squeezing sky-high inflation out of the system and exacerbating what could prove to be a severe economic downturn. Earlier this week the International Monetary Fund released its latest economic forecasts, predicting UK GDP would fall by 0.6% this year, the worst for any G7 country. The IMF forecasts were predicated on tighter government spending policies, higher interest rates and the ongoing impact of higher energy prices on household budgets. That chimes with our own view, at Titan Asset Management, that the problems facing the UK economy are more than just cyclical. Even before the Brexit referendum the UK had one of the lowest investment rates within the OECD, and this gap has only widened, exacerbated further by Brexit and the pandemic. Delivering policies to boost growth will help reverse that trend but we have concerns over the magnitude, time and money, required to reverse this trend.” 

Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management, said: “The recent continued rate rises by the ECB and the Fed had put pressure on the MPC to continue tightening policy. The Bank has a difficult balancing act though as the current cost of living crisis combined with higher interest rates and higher taxes means that the growth outlook for the UK is gloomier than it has been since the dark days of Covid, and we’re likely to see a continued slowdown in economic activity over the coming months. The inflation continues to be largely supply driven and interest rate increases are not going to assist with these contributory factors to inflation. Whilst we have more political stability than we have done for some months, economic instability unfortunately continues..”

Douglas Grant, Group CEO of Manx Financial Group, said: “Another rise in interest rates was expected despite fears the UK is falling into recession and businesses struggle to survive yet another cashflow squeeze. The raise should act as an alarm bell for SMEs to review their existing lending structures and ensure they are ready for further hardship.

“Slowing inflation data provided a glimmer of hope for small businesses but still represents worrying numbers and indicate that a recession will likely afflict the UK in 2023. On top of this, this week’s IMF report painted a bleak picture for the UK at a time when most other leading economies are expected to grow. While many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, it is now too late for other businesses which were not so forward thinking. We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis. Our research revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it. What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance. SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. The level of growth that is being prevented is significant and will require novel solutions which are designed to bridge this funding gap.

“Despite positive introductions and extensions to loan schemes last year, such as RLS Phase 3, more proactive action is needed. Since the pandemic-caused economic turmoil, we have been calling for a sector focused permanent government-backed loan scheme which brings together both traditional and alternative lenders to guarantee the future of our SMEs. As the government looks for ways to power the economy’s resurgence in 2023, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies and, in turn, our economy. We very much hope this is something that becomes a reality.”


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