After the Bank of England increased interest rates for the fourteenth time in a row in a bid to tackle inflation, investment managers discuss what this will mean for the economy, investments, savings, mortgage holders, as well as the possibility of further rises.
The Bank of
England increased interest rates by 0.25 per cent
to 5.25 per cent this week, taking the base rate to the
highest level since April 2008, to fight inflation
which currently stands at 7.9 per cent. The rise was in line
with market expectations.
The monetary policy commitee voted six to three in
favour of the 0.25 per cent rate rise, with two
members preferring a steeper rise to 0.5 per cent and one
preferring to leave the rate. The government has pledged that
inflation will be 5 per cent or below by the end of the year, but
the overall target remains at 2 per cent.
The base rate influences the cost of borrowing, meaning that a
rise can lead to more expensive mortgages. But it can be good
news for savers, as banks may offer greater returns on savings
accounts, Wealth Club said in a statement. Further rate
rises haven’t been ruled out, if there is evidence of more
persistent inflationary pressures. The Bank’s governor Andrew
Bailey said the MPC’s efforts meant that inflation was on course
to meet its 2 per cent target.
Here are some reactions to the hike from investment
managers.
Nicholas Hyett, investment manager, Wealth
Club
“The MPC is sitting on the fence in its minutes. Recent strength
in wage growth has clearly got Bailey & Co worried. But
there’s also a recognition that the past rate rises are starting
to weigh on economic activity, which has led to a slight slowdown
in rate rises. But the penultimate line of the summary says it
all: “If there were to be evidence of more persistent pressures,
then further tightening in monetary policy would be
required.” The Bank is determined to keep its eyes on the
monetary road regardless of the noises coming from the back
seat.”
Nicolas Sopel, head of macro research and chief
strategist, Quintet Private Bank (parent of Brown
Shipley)
“The BoE noted some progress on the inflation front, “falling but
still too high.” However, the Bank’s projections, which were
revised slightly lower for 2023 and 2024, still revealed that
inflation will remain above the 2 per cent target and only return
to that target by the second quarter of 2025. This underscores
the MPC’s view that the Bank rate must remain restrictive for
longer. While economic data has turned more mixed and despite
slowing growth, we think that the Bank of England will continue
to raise the Bank rate in 2023, bringing it to 6 per cent. This
is because underlying price pressures remain elevated, driven by
strong wage growth. The BoE will likely be the last central bank
in developed markets to pause its tightening cycle.”
Mike Stimpson, partner, Saltus
“Our latest Saltus Wealth Index report, published last month,
highlighted that nearly nine in 10 of high net worth individuals
are worried about rising rates impacting their monthly mortgage
payments. The report also revealed that 35 to 44-year-olds are
experiencing the biggest pressure on their finances as a
result. Nearly 40 per cent said that rising mortgage
payments had already placed a strain on their cashflow, whilst 47
per cent said that they expect to feel the pinch in the coming
months. Looking further ahead, we expect interest rates to remain
high, potentially reaching a peak of 5.75 per cent in the first
quarter of 2024. While rate rises have cooled inflation in the
last month, they have not had a sufficient impact to have the
Bank of England consider bringing the base rate back down.”
Jonathan Sparks, chief investment officer – UK and
Channel Islands – HSBC Global Private
Banking & Wealth
“In contrast to the well-telegraphed decisions from the Fed and
European Central Bank last week, the market viewed today’s
decision from the Bank of England as highly uncertain. The
central bank has taken the more dovish view and raised rates by
25 bps, compared to our expectation of 50 bps, to 5.25 per cent.
We therefore expect a further 25 bps from the Bank. Our view
was that the market was expecting too many rate hikes by the Bank
of England, especially after the recent fall in inflation. Hence
our recent call to take profit on our bullish sterling view, and
moving to neutral. For the same reason, we are increasingly
comfortable with extending gilt duration, to seven to 10
years. Relatively speaking, the BoE has a window of
opportunity to avoid being the outlier amongst central bank
peers. We think the Fed has finished hiking now and we only
expect one more hike from the ECB. Given the cooling off
reflected in recent UK inflation readings we don’t see a
significant risk of the Bank of England having a longer rate
cycle compared to the US and EU, even with this 25 bps hike.”
Charles White Thomson, CEO Saxo
UK
“We should not underestimate the speed and ferocity of such rate
moves and the pressure this is applying to the leveraged
consumer. The full extent of this has yet to be seen, as
with inflation there is lag, including mortgage holders who are
rolling off unprecedented super cheap deals. Monetary policy
setters, especially in the UK, have a highly difficult conundrum
to solve – defeat inflation with the blunt weapon that are
interest rates without breaking the economy and
consumer. The risk for further policy failure is real and
the stakes are getting increasingly high. I would like a full
review of our monetary policy, and the performance of the
governor and the MPC to be carried out by generalists as well as
economists.”
Harry Richards, investment manager, fixed income, Jupiter
Asset Management
“CPI in the UK may have begun to fade from the recent highs, but
it remains well above the 2 per cent target that would allow the
BOE to declare victory over the inflation battle. Interest rates
are starting to bite. House prices are falling at their fastest
pace since 2009, broad money growth is stagnant, retail sales are
lacklustre, and the UK Manufacturing PMI already stands at
recessionary levels which typically leads the services side of
the economy. Unfortunately, a growth lifeline from Europe isn’t
looking particularly likely either as the data there is worse
still and the single currency union makes up over 40 per cent of
UK exports. Keep in mind, the phasing of the peak in UK inflation
was far later than in most regions of the developed world which
results in powerful base effects as we move into the end of the
year. This should drive headline inflation materially lower in
the next few months. Should the labour market start to soften as
we anticipate, a deeper recession lies ahead and that will only
act to accelerate the pace of disinflation.”
Douglas Grant, group CEO, Manx Financial
Group
“Today’s rise in interest rates is yet another blow to
businesses, amidst the already challenging and delicate balancing
act between managing inflation and signalling a recession.
Stubbornly high inflation and only small increases in GDP data
have highlighted the economic rollercoaster that lies ahead. SMEs
must take this as a 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
damaging knock-on effects. According to our recent research,
40 per cent of SMEs – compared with 27 per cent last year – have
had to stop or pause an area of their business due to a lack of
external financing. As the government looks for ways to curb the
highest rates of inflation in decades, 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.”
Andy Burgess, fixed income investment specialist, Insight
Investment
“The Bank acknowledged that current policy was restrictive and
may have to stay that way for a “sufficiently long” period.
Indeed, as we near the peak in rates, the focus may start to
shift from how high rates go to how long they will stay there.
The risk of recession remains ‘significant’, although strong pay
growth and elevated levels of service inflation suggest that
“persistent inflationary pressures may have begun to crystallise.
In our view, however, headline inflation is likely to continue to
slow from here, not least due to base effects and energy prices
continuing to fall. The Bank remains data-dependent, with
inflation data released in the months ahead critical to how high
rates ultimately go.”
Jamie Niven, senior fund manager, Candriam
“Our takeaway is that the MPC favours a cautious approach to
further hikes and gives the impression that the current
restrictive rates are close to the peak it foresees. However, it
would have been dangerous to communicate this alone given its
potential impact on financial conditions, and it therefore
prefers to imply higher rates for longer, as opposed to a higher
terminal rate followed by cuts. It is our belief that the current
restrictive levels will cause a larger growth impact, eventually
resulting in lower policy rates than currently implied by market
expectations.”
Julian Jessop, economics fellow at the free market
Institute of Economic Affairs
“The Bank’s decision to raise rates again, albeit by just a
quarter point, suggests that the MPC is still looking in the rear
view mirror. Money and credit growth have already slowed sharply
and other leading indicators of inflation have weakened,
including commodity prices and evidence from business surveys. It
would have made more sense to pause to assess the impact of the
large increases in rates that have already taken place, as other
central banks have done. The UK economy is like a frog slowly
being cooked by ever higher interest rates. By raising the
temperature further now, the Bank risks doing too much and, once
again, only realising its mistake when it is too late.”
Jeremy Leach, CEO, Managing Partners
Group
“One has to consider whether the decision by the Bank of
England to make its base rate 21 times higher than it was 18
months ago will have much of an impact on the global price
of goods and services when the population of the UK is 0.85 per
cent of the global population. This financial pressure of pushing
interest rates so high in such a short period of time has had a
crippling impact forcing many people into poverty or financial
hardship. It has been the cause for discontent over salary levels
that have led to industrial action at a point when governments
have lower financial resources as the cost of servicing the
existing debt has risen and most of this is as a result of higher
interest rates. Whilst inflation has been beneficial in as much
that the real value of that debt has fallen the increases in
interest rates make the cost of servicing that debt much more
expensive.”
L&C Mortgages
“The past few weeks have seen the rising mortgage payments
and high-interest rates make front page news, with these
increases pressuring the finances of millions of borrowers in
Britain, triggering a surge of uncertainty about where interest
rates will go next. However, the latest news has now caused
a surge of online interest in those looking to get more
information and help on mortgages, interest rates and rent,
highlighting the massive impact of the cost-of-living crisis on
the British public. There are still plenty of deals available for
borrowers looking to switch, but remortgaging a home is a
decision that should be made with thorough research and
help. Some tips to keep in mind during these uncertain times
would be to shop around for the best rates available, which can
be done online or by using a mortgage broker. Or look to request
to extend the term on your mortgage so that you can pay a smaller
amount each month but for a longer period. Another option could
be to switch to interest-only temporarily; this can reduce the
monthly amount of your payments in times of need and financial
difficulty. Lastly, if you are struggling for tailored support,
talk to your lender to help find the best solution.”
