Bank of England hikes rates by 0.75% – experts react

by | Nov 3, 2022

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As markets had been anticipating, the Bank of England has announced that that Monetary Policy Committee (MPC) has agreed to increase UK base rates from 2.25% to 3% as the fight against inflation continues. This follows a similar 0.75% hike from the Fed yesterday as well as from the ECB recently with fears of inflation becoming entrenched dominating.

But what does this mean for investors and clients? Investment and finance experts have been sharing their thoughts with us as they comment below:

David Goebel, Associate Director of Investment Strategy at UK wealth manager Evelyn Partners, says: “Markets had been pricing in continued rate hikes up to as much as 5.25% next year, but the Bank made clear in its statement today that this was not a likely path, saying that the peak in rates will be “lower than priced into financial markets”. It forecast that following the market path would result in a long recession – two years from Q3 2022 to Q3 2024 – and reducing inflation to near-zero, far below the Bank’s 2% target.

“This implies that the peak for bank rate will be below 5.0%.

“For market-watchers and investors, a divergence between the rhetoric from the US Federal Reserve at their meeting yesterday and that from the Bank’s today can be observed. Fed Chair Jerome Powell warned markets not to underestimate the likely path of interest rates while the MPC effectively implied the opposite about UK rates. This has resulted in GBP weakness in the market today and could continue to have that effect in the short term. GBP weakness benefits those companies in listed in the UK who derive a considerable proportion of their earnings overseas, like the oil companies, which also look set to continue to benefit from the prevailing environment of high prices.”

Richard Ollive, Senior Financial Adviser at Wesleyan, said: “We haven’t seen a Bank Rate hike this big since the 1980s. This should be good news for savers, but so far banks have dragged their feet when it comes to passing better interest rates on to consumers, though we’ve seen variable rate mortgages go up almost instantly. So, the biggest impact of today’s announcement will fall on those with debts, including mortgages.

“Looking at the mortgage market, the average rate on a fixed two-year mortgage is now around 6.5%, well above the 2.25% it was a year ago. To put this into pounds and pence, a person with a £250,000, 25-year mortgage coming off a two-year fix at 2.25% will see their monthly mortgage payments soar by £600 if they took another deal at 6.49%. With around 1.8m homeowners expected to come to the end of their fixed-rate deal in 2023, it’s no surprise that recent ONS research found that half of people on fixed rate mortgages are worried about changes in mortgage interest rates.

“We can confidently imagine rates will rise further before the end of the year, heaping even more pressure on household budgets. Saying that, forecasters had been predicting that the Bank Rate could rise to 6% next year, but the Bank of England is now signalling that rates are now unlikely to exceed 5%, which will come as a relief to many. Those with savings will be well advised to investigate where they can achieve the best possible returns, including investing in Stocks & Shares ISAs.”

Edward Park, Chief Investment Officer at Brooks Macdonald: “Today’s 75bps rise met market expectations, however it was delivered alongside a strong steer that rates are unlikely to reach the 5.25% terminal rate currently priced into bond markets. It’s worth noting that two of the Bank of England’s voting members even backed a smaller rate rise today with Dhingra opting for 50bps and Tenreyro voting for just 25bps.

“The Bank of England laid out two scenarios, one where rates rose to the 5.25% expected by the market, in this case the Bank forecasts a recession which would last two years. In the alternative scenario, where interest rates stayed at the new rate of 3%, the Bank forecasts only 5 quarters of contraction. In both cases, inflation undershoots its target towards the end of the forecasted period, this could mean the long awaited ‘pivot’ is coming into sight.

“The market has quickly concluded that the Bank of England’s largest interest rate hike in 30 years disguises a far more dovish tone. However, with rates at 3%, investors should remember that the Bank has already exceeded their previous estimates of the UK’s terminal rate and has pushed back against market expectations for higher UK rates throughout 2022.

“The reality is that the Bank of England, like all central banks, is beholden to the fast-changing inflation and economic growth outlook. UK inflation is further complicated by a weak pound which has imported global inflationary pressure into the UK through higher sterling costs for dollar and euro goods. While the Bank of England’s dovish rhetoric may have pushed back against market expectations for UK interest rates, bond markets will bear in mind that the UK is not fully in control of its inflation destiny.”

Kirsty Watson, chief operating officer, adviser at abrdn, said: “Advisers will have been keen to see just how high the Bank of England base rate would climb after inflation returned to double digits in September.  

“This latest base rate hike will put even greater pressure on clients’ expenditure and could impact their appetite for investment. And with the Chancellor ending universal energy support from next April and high inflation predicted to persist into next year, there is no respite in sight.

“Against this backdrop, advisers need to be prepared to answer urgent questions and support clients with the practical support and the reassurance they need.

“Ensuring that clients continue to take a long-term view, avoiding potentially damaging short-term reactions, and maintain the right balance of investments for their financial goals will be key.”

 Andrew Aldridge, Partner at Deepbridge Capital, said: “Quelling rampant inflation and kickstarting a slowing economy left the Bank facing a difficult balancing act, with today’s interest rate hike to 3% hardly surprising in this context.

“Fiscal and monetary policy remains murky as we move towards year close, and this environment poses significant challenges for investors and financial advisers in the public markets. Turning to private markets and venture capital as an alternative investment can offer steady long-term growth opportunities, with unparalleled tax reliefs available via the Enterprise Investment Scheme.”

Jeremy Batstone-Carr, European Strategist at Raymond James, said: “After the political and economic upheaval of the last few weeks, the Bank of England’s move to increase the base interest rate to 3% is an attempt to steady the ship, even if this requires sailing through a recessionary storm in order to get to the calmer waters on the other side.  

“The Bank now finds in the government a willing participant in stabilising the UK’s finances, something it likely takes as a relief after being forced to put out market fires that followed the previous government’s ‘dash for growth’. The new Prime Minister and Chancellor are preparing an Autumn Statement aimed at reducing national debt that could contain as much as £50bn in incremental budgetary savings, a move that could reduce UK GDP by four whole percentage points.

“There is no doubt we are now looking down the barrel of a recession, which is unfortunately a necessary by-product of the policies required to restore fiscal credibility. The aim is stability in the long-term, as further highlighted by the Bank beginning quantitative tightening, with the Bank hoping the economy will rise out of the recession by this time next year.”

Richard Carter, head of fixed interest research at Quilter Cheviot: “Today’s 0.75% Bank of England interest rate hike marks the biggest increase in more than three decades and the eighth consecutive rise as the Bank continues its lengthy battle with inflation.

“Markets had widely anticipated the hefty rate hike, particularly given the Bank has had to make the move prior to the government’s fiscal statement after it was delayed until later this month. However, this latest move is actually significantly lower than it could have been given the furore caused by the mini-budget just a matter of weeks ago. The change of Prime Minister appears to have restored some calm to UK bond markets, and the BoE could take a smaller step as a result.

“The Bank now predicts that inflation will rise to approximately 11% in Q4 2022. Inflation reached a 40-year high of 10.1% in September, meaning we still have a way to go yet. As such, further rate rises are no doubt on the cards in the months ahead, but the pace at which they are increased is likely to slow. Mortgage rates are already reaching increasingly high levels that are fast becoming unaffordable for many, and the prospect of tax increases at the Chancellor’s upcoming Autumn Statement may also put a dampener on future hikes.”

Rob Morgan, Chief Investment Commentator at Charles Stanley: “This ‘jumbo’ 0.75% hike falls short of what could have been more aggressive policy, but there is no escaping that financial conditions are rapidly tightening for businesses and consumers alike.

“Borrowers, including mortgage holders, are now seeing substantial additional costs from their interest payment compared with a year ago. For those with a variable rate mortgage – such as a standard variable rate or tracker – rate rises are usually swiftly passed on and directly increase monthly payments. With Bank of England base rate having risen from 0.1% to 3% in short order some household finances are increasingly stretched. 3% is still low in a historical context, but to conquer troublesome inflation rates are likely to rise further, potentially to 5% or more before declining. Those that have locked into low fixed rates are well positioned for now, but it’s a more difficult time for people whose fixed deals are ending or have no choice but to continue with a variable rate product.

“Somewhat oddly, fixed rate mortgage deals are starting to become a bit cheaper despite this interest rate rise because they are driven by what the market expects to see over the term of the deal. With interest rate expectations having dropped since Kwasi Kwarteng’s now infamous ‘mini-Budget’, fixed mortgage rates have slightly improved. The appointment of Jeremy Hunt as chancellor, subsequent reversal of mini-Budget measures and the arrival of Rishi Sunak in Number 10 has stabilised the political scene and sent gilt yields – which dictate the price of fixed rate mortgages – falling.

“Savers are now starting to see some recompense for price rises with available rates on the most competitive savings products. They are still behind the prevailing inflation rate, but cash, if well managed, is beginning to preserve spending power a little better. The income available from financial assets such as shares and corporate bonds is also more compelling following market falls since the turn of the year. They could provide opportunities as and when Central Bank’s thoughts turn to cutting rates as inflation subsides and recession red flags emerge.”

Les Cameron, Savings Expert at M&G Wealth, said: “Given the current climate, a significant hike in interest rates was to be expected. More important, however, is the impact this has on savings rates and borrowing rates.

“Coupled with sky-high inflation, even with increases in savings rates, for the majority of cash or near-cash savers, their money is being eroded in real terms – now so more than ever. This will have a significant impact on those such as pensioners, who spend a higher proportion of their cash savings on energy bills and are likely to feel the brunt of the impact.

“With the UK in the midst of a cost-of-living crisis, this is going to be the case for many, and could really have a detrimental effect on people’s savings and those repaying debt which is not on a fixed rate.

“With budgets being squeezed people will inevitably look at cutting costs. It’s important to think very carefully about stopping pension contributions, as your employer may be matching these contributions which is a valuable benefit to give up. Rebuilding your pension fund to where you could have been if you had not stopped could be hard. 

“Likewise, stopping any protection policies needs very careful consideration.  That protection is there for a very good reason which has not changed with interest rates rising, and there is no guarantee that you’d get the same terms if you looked to restart any cover.

“Reviewing your finances and ensuring your money can be resilient against future challenges is now more important than ever. Seeking professional financial advice can be the best place to start.”

Edward Hutchings, Head of Rates at Aviva Investors: “The Bank of England duly delivered on financial markets expectations of a 0.75% hike. This will most likely mark the peak in pace of tightening, especially with the Bank highlighting financial markets are pricing too much too soon. Next up for the UK will see the focus shift to the Autumn Statement to see what the Chancellor’s fiscal plans are, but in the meantime the headlines point to Gilts being relatively more supported, however the currency less so.

Tom Stevenson, investment director for personal investing at Fidelity International, commented: “The Bank of England had no choice but to remain in lock-step with the Federal Reserve and ECB, hiking rates by 0.75 percentage points to 3%. Not to have matched their latest moves would have dented its credibility and put further pressure on the pound.

“The Bank was ‘flying blind’ today, with confirmation of the Chancellor’s tax and spend plans still two weeks away. It could only guess the extent of the fiscal squeeze the government is planning. And the messages from the markets that it usually relies on were badly distorted this month by the aftermath of September’s mini budget.

“The hike in rates is (leaving aside the chaos of Black Wednesday in 1992) the biggest single increase since 1989 and puts rates at their highest level since November 2008. However, the journey to a likely peak in rates of around 4.5% next year still has a way to run. A recession, rising unemployment and falling house prices are a near certainty now.

“The outlook for households and businesses is tough. But for investors, who have already priced in much of the slowdown to come, the turning point will come sooner. Markets don’t wait for the dawn to break; they start to rise at the first hint that better times are on their way.”

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