James Lynch, fixed income investment manager at Aegon Asset Management, says:
“The market pricing in 67bps going into the BoE meeting, a 50bps or a 75bps was going to be a surprise. In the end there was a three-way split. Three for 0.75%, five for 0.50% and one for 0.25%. The surprise that the new member of the committee Swati Dhingra chose only 25bps, this means the replacement for the Hawkish Michael Saunders has been a straight swap for a dove.
We also had a confirmatory vote confirming that active gilt sales will start on the week of 3rd October and of course there was mention that BoE will assess the implications of the Government’s growth plan.
Following today’s announcement, the market will quickly turn to its attention to the fiscal plan on the 23rd and how much the BoE will have to raise interest rates by to offset the stimulatory efforts from the new Government.”
Rupert Thompson, Investment Strategist at Kingswood, comments:
“The Bank of England decision to raise interest rates by 0.5% took rates up to 2.25%, their highest level in 14 years. However, while the Bank said it would continue to respond forcefully as necessary to inflation, it did not follow the lead of both the Fed and the ECB which both raised rates by as much as 0.75% in their latest move. The Bank’s decision to increase rates more slowly than its counterparts can only increase the downward pressure on sterling, particularly given the government’s large fiscal boost which is likely to reinforce underlying inflation pressures.”
Ed Hutchings, Head of Rates at Aviva Investors, adds:
“With financial markets at the margin expecting a hike of 0.75%, the decision to do 0.50% but to begin quantitative tightening in October feels somewhat more of a balanced outcome for financial markets. However, given the backdrop of fiscal tailwinds, strong employment data and inflation yet to fall, I would expect both Gilt yields and Sterling to remain somewhat unloved for the foreseeable.“
David Goebel, Associate Director of Investment Strategy at wealth manager Evelyn Partners, concludes that the MPC’s job is becoming ever-more challenging:
“As well as inflation at its highest for a generation and faltering expectations for economic growth, the Bank has a new political administration to consider. Liz Truss’ government is set to be very expansionary in fiscal terms, in an attempt to boost growth, with a few specifics of its economic policy revealed at Chancellor Kwasi Kwarteng’s “fiscal event” tomorrow. While the Bank’s primary mandate is to maintain price stability – i.e. control inflation – without a full view of policy direction it makes decision making difficult given the potential impact on consumer finances and spending.
“A policy that has been announced which will have impacted the Bank’s decision making today is the Energy Price Guarantee. The scheme, expected to cost as much as £150bn, caps the unit cost of energy to end users. While this cap is at levels of approximately double what prices were a year ago, it will be a welcome development to both consumers and businesses. It will also serve to limit peak consumer price inflation, which it had been driving. Bloomberg Economics estimate that, as a result, peak levels of Consumer Price Inflation should now be at 10.5% in October, rather than 15% in January as per their previous estimate.
“This on the face of it is welcome news for the consumer and the Bank, but the shortfall in energy prices will be financed by government spending, which will result in higher levels of borrowing. This increased level of borrowing has already seen the cost of debt increase significantly. Yields on 10 year gilts have increased from 2% to nearly 3.3% since mid-August, as investors demand higher compensation for financing a deteriorating fiscal position. Sterling has devalued against both the US dollar and Euro, which will lead to higher levels of imported inflation in future.
“There are beneficiaries to a broadly weaker currency. Sterling prices of assets, like UK-listed equities look more attractive to foreign investors. In particular, those in the energy sector look set to benefit from the prevailing environment of high prices, whilst the new government have said they will not be imposing any further windfall taxes, unlike those being levied on their European counterparts.”
