At midday today, the Bank of England (BoE) released the latest Monetary Policy summary and minutes of the Monetary Policy Committee meeting – MPC is the body responsible for making decisions about Bank Rate.
The MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 16 March 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.25 percentage points, to 0.75%. One member preferred to maintain Bank Rate at 0.5%.
The MPC also commented that, based on its current assessment of the economic situation, the MPC judges that “some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve.” Given the huge levels of uncertainty and inflation at a 30 year high in the UK, the chance of further tightening in future is not a surprise.
Ben Kumar, Senior Investment Strategist, 7IM, believes it would have been surprising had the Bank NOT increased Bank Rate this time around commenting:
“The hike sees interest rates return to where they were before the Covid-19 crisis started two years ago, but we expect further increases to follow, given our view that inflation is likely to remain above the 2% target, even once the short-term impact of COVID-19 and, hopefully, Ukraine fade over the next twelve months.
“The previous decision almost saw the MPC vote in favour of a double rate hike, but this time around it wasn’t quite as convincing. For the first time in a while, the decision to hike interest rates was not unanimous, but there was still a strong majority favour of 8-1. Deputy governor Jon Cunliffe voted to leave rates at 0.5%, arguing that Russia’s invasion of Ukraine could “increase uncertainty and decrease consumer and business confidence”.
“We remain calm, despite the decision, for a number of reasons, with the primary one being that the rate hike had already been priced in – it would have been more surprising if the decision had been to NOT increase rates. Secondly, there has (so far) been very little real-world impact of the previous hike and the actual economic cost of this rise is unlikely to be significant, as interest rates continue to be at historic lows.
“A number of our existing tactical positions help protect our portfolios against inflation. However, these are not responses to higher inflation, but are rather more considered positions based on our assessment of the economic environment, where over the next few years we see higher inflation, but also expect to see higher growth. Our allocations are representative of that, as we remain underweight in bonds, overweight in cyclical equities and continue to invest in healthcare, where prices are inelastic.”
Caspar Rock, Chief Investment Officer at Cazenove Capital, also predicted that the BoE would raise rates. He comments:
“Amid inflation forecasts of 7.5 per cent by spring, it comes with little surprise that the Bank of England has opted to raise rates by a further 0.25 basis points to 0.75 per cent.
“The nature of the shock from soaring energy and commodity prices which has struck the UK economy following Russia’s invasion of Ukraine puts the MPC in a very difficult position. Steering inflation back to the target of 2%, despite any trade-off this may present for economic growth, is still set to be its priority and we continue to hold the view that there are several rate hikes to come.
“However, the Bank may tread more cautiously in the spring as it assesses the impact of the rise in National Insurance and the energy price cap. Looking forward, the prospects for further rate rises are likely to depend on the extent to which oil price rises feed through to other areas of the economy, particularly wages.
“From an investment perspective, volatility across global financial markets since Russia’s invasion of the Ukraine has encouraged investors to once again search for defensive asset classes. In the near term, the outlook for government bonds looks more challenging, with both nominal and real yields likely to continue moving higher from current low levels. We think alternative assets have an important role to play in diversifying portfolios in the current environment.”
Steven Cameron, Pensions Director at Aegon suggests that the updated BoE inflation forecast means state pensioners could receive bumper increase of over 8% from April 2023 as he comments:
“The Bank of England’s latest prediction is that inflation might reach 8% in the Spring and could be even higher later in the year*. Previous forecasts had suggested a peak in April but then a gradual decline. While further short term increases will be highly unwelcome to the millions already struggling with the current cost of living squeeze, there could be a silver lining for state pensioners.
“The state pension triple lock grants increases of the highest of earnings growth, inflation or 2.5%**, although for the coming tax year the government has removed the earnings component due to distortions during the pandemic and furlough. Many pensioners were left disappointed when the government broke this manifesto commitment and temporarily replaced the triple lock with a less generous ‘double lock’, meaning the state pension will rise by 3.1% this April, far below the current inflation rate of 5.5%. For those already struggling with rising prices, this may leave pensioners feeling left out in the cold.
“But the calculation of the increase from April 2023 will use inflation till September 2022, which could be near its peak of 8% or above. The triple lock will pay this, or even more if earnings growth is higher again. Without the government doing any further tinkering, this could put state pensioners on target for a bumper 8% plus increase in 2023, potentially the highest increase ever, compensating for the relatively low increase this April. While not helping to alleviate this year’s pressures, it will at least offer a more generous increase in the future. And, any significant increase in the state pension will boost the income of current state pensioners and future generations.”
Following the announcement, Rachel Winter, Associate Investment Director at Killik & Co, said: “The Bank of England had no choice but to raise interest rates today, as the escalation of geopolitical events has continued to feed the ferocious beast of rising inflation. This follows on from the Federal Reserve’s decision to raise rates yesterday.
“Whilst the Ukrainian crisis is by no means the sole cause of increasing inflation, it has certainly exacerbated the cost of living crisis. The global prices of energy and food will continue to rise as the UK seeks to phase out its use of Russian oil and find a way around a lack of access to Russian fertiliser. Ukraine is often referred to as the ‘bread basket of Europe’, and the disruption to the country’s wheat exports will no doubt feed into inflation numbers too. With some economists predicting that inflation could reach 10% by October, the outlook appears rather bleak in the short-term. However, with economic growth starting to slow as a result of higher energy prices, it is unlikely that central banks will push ahead with as many interest rate rises as they had planned previously, and this would actually be good news for the stock market.
“With individuals being squeezed by rising bills, shopping around for the best deals is essential. It may be worth considering locking into a fixed rate mortgage while interest rates are still at relatively low levels. Furthermore, as the ISA deadline for 2021/22 approaches on April 5th, it may be prudent to move cash savings into a fixed term ISA, which could offer a higher return on savings than a current account.”
Commenting on rising interest rates and what this means for SMEs, Ian Warwick, Managing Partner at Deepbridge Capital, said:
“With interest rates rising again, many SMEs may be worried about their ability to access financial support in order to both survive and grow. SMEs are already facing significant concerns about the gradual devaluation of their working capital due to rising inflation. Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. It is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies, which we believe will be at the forefront of economic growth.”