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‘The Bank of England’ has raised interest rates by 0.5 percentage points to 2.25 per cent – Expert reaction

Following the announcement that ‘The Bank of England’ has raised interest rates by 0.5 percentage points to 2.25 per cent industry experts have reacted to the news.

Russell Silberston, Strategist at Ninety One, commented: “The Bank of England raised official interest rates by another 50bps today, bringing Bank Rate to 2.25%. The vote to implement this, however, was mixed, with 3 members of the Monetary Policy Committee wanting a more aggressive 75bps increase and the newest member preferring 25bps. Relative to market expectations, it was marginally dovish, with several participants expecting a larger increase, in line with action from other central banks over recent days.

The root of the Bank’s compromise and today’s neutral decision is that it is just too soon to determine the macroeconomic effects of the government’s Energy Price Guarantee and tomorrow’s Growth Plan. The former will lower the peak in CPI inflation by 5 percentage points early next year but will likely increase demand. The latter will clearly provide further fiscal support at a time when domestic inflationary pressure is increasing. The Bank was therefore left awaiting clarity and promised that they would make a full assessment of the government’s actions at their next meeting in November.

With money markets pricing in a peak in Bank rate close to 5% by summer 2023, the market is more bearish on the UK than it is on the US or eurozone. With active quantitative tightening also kicking off today, there is an awful lot of tightening priced. Whether it’s justified will likely depend on whether the new government’s dash for growth is real or rhetoric.”

Dr Matthew Connell, director of policy and public affairs at the Chartered Insurance Institute, said: “It may seem strange that at the same time as the Government has announced a huge bailout for households to make energy bills more affordable, the Bank of England is making mortgages less affordable.

“However, the interest rate rise will have a bigger impact on higher income households, as research published by the Institute of Fiscal Studies early in September has shown.

“So this rise will help to calm spending by higher income households, without removing the vast majority of fiscal help going to smaller households.

“Households who are facing a squeeze on spending should get advice before cancelling any insurance. There may be situations where life insurance contracts allow for some flexibility in hard times, or where cover can be tailored to be more affordable. Cancelling cover altogether could be a false economy if the worst were to happen.”

Hinesh Patel, portfolio manager at Quilter Investors, said: “Today’s move by the Bank of England to increase interest rates by 0.50% for the second month in a row is also the sixth consecutive rise as the Bank continues to attempt to beat back the flames of inflation and shore up the soggy pound.

“Markets were expecting a larger 0.75% increase, following the same increase yesterday by the Federal Reserve which pushed sterling to its weakest against the dollar since 1985. The Bank of England continues to be on the back-foot and playing catch up with the Fed, and at 2.25% UK rates lag the 3-3.25% range in the States.

“The BoE also missed an earlier window of opportunity to, at the very least, dampen the impact on sterling. Instead, the Bank is now in a quandary of how to set policy rates with fiscal uncertainty and a ratcheting up of government borrowing. The Reaganesque policies being pitched by the new cabinet may boost growth, but in our opinion will add to core inflationary pressures in the medium term.

“This comes at a time when the net supply of Gilts to the market is being exacerbated by accelerating quantitative tightening. In the near-term, however, money trends suggest the inflationary pulse is in the rear-view mirror. Coupled with the hit to business confidence and consumer spending power this year, we expect the Bank will be hiking into a rapidly deteriorating, but not disastrous, environment.

“For investors, this has now produced one of the most prospectively attractive set-ups for fixed income assets in at least a decade.”   

Oliver Jones, Asset Allocation Strategist at Rathbones, commented: “The Bank of England’s 0.5 percentage point interest rate increase today might have been even larger if not for the government’s decision to freeze energy bills, which policymakers noted should “lower and bring forward the expected peak of CPI inflation”. Three of the monetary policy committee’s nine members voted to follow the Federal Reserve with a larger 0.75 percentage point move instead. However, even if interest rates do not rise quite as quickly in the next few months as the aggressive path previously discounted in markets, there are still significant longer-term risks.

“As the Bank noted, the energy bill freeze will support demand – it’s a major loosening of fiscal policy, potentially worth more than 4% of GDP. That may well be compounded at the emergency budget tomorrow, where substantial tax cuts are likely to be announced, equivalent to perhaps another 1% of GDP. The net result is that underlying inflationary pressure could remain stronger for longer than it would have done otherwise, despite the probable lower peak in the headline rate. The Bank is reserving full judgement on the new fiscal measures until its new forecasts are published in November. But it did suggest that the energy bill freeze will “add to inflationary pressures in the medium term”, echoing the words of the Bank’s Chief Economist Huw Pill in his recent testimony to MPs. The latest inflation and labour market figures won’t have soothed any nerves about the strength of underlying inflation either, with core inflation rising to 6.3% and nominal wage growth still above 5%. If underlying inflationary pressure does indeed remain strong for longer than previously seemed likely, the Bank’s tightening cycle may last longer than is widely anticipated, raising the possibility of further increases in the yields of long-dated Gilts.”

Derrick Dunne, CEO of YOU Asset Management (YOU), commented: “Despite interest rates rising less than expected to 2.25%, households will still start to feel the weight of extra costs like increased mortgage rates and spiralling inflation.

“While increased rates mean higher cash savings returns, clearly inflation is far outstripping this and will still leave savers with less in their bank accounts in real terms. In order to protect against inflation, people should consult with a financial adviser about the best way to invest their savings that will mitigate the impact of inflation and keep it protected from market fluctuations.

“For those already invested, making any snap decisions to your savings or investments could derail growth plans in the long run. It’s important stay invested in well diversified portfolios designed to provide sustainable growth and be robust enough to weather the current economic crisis. A financial adviser can help make the most appropriate decisions.”

Charlotte Jones, Senior Consultant at XPS Pensions Group, commented: “A rise of at least 0.5% was already anticipated by investment markets, with a c2.7% rise in long-term government bond yields since December 2021 reducing liabilities of UK DB pension schemes by £750bn, nearly 35%.

“Analysis by XPS’s DB:UK funding tracker shows that UK pension schemes are now in surplus*, with the improvement in funding positions largely attributable to rising interest rates. The energy cap should lead to prices rising less quickly than previously feared, but with the future far from certain, pension scheme trustees should strongly consider taking measures to lock in some of these gains by reducing levels of risk in their investment strategies or securing members’ benefits with an insurance company”.

Finn Houlihan, Managing Director at Arlo Group and ATC Tax comments: “The Bank of England’s decision to increase the interest rate by a substantial 0.5% points marks the highest rate since the start of recession in 2009, and is an unavoidable response to inflation.

“While the increase is designed to ease the impact of inflation on households and businesses and bodes well for savers,, people with significant or multiple mortgages will continue to feel the pinch, especially those on variable rates. Even those on fixed rate mortgages who are seemingly unaffected should be conscious of double checking when they will drop onto a variable rate as they could suddenly face extremely high costs.

“The biggest concern for households is to understand how they still afford those payments while dealing with soaring energy prices, and many will be looking at tomorrow’s announcement by Liz Truss for answers. In the next few weeks, and with the EU emergency energy summit on the 30th, there are signs that energy prices are set to decrease in the near future but in the meantime, the energy crisis is compounding the grim outlook for some borrowers. 

People can hope that the measures taken by the new Government will cushion the impact of the rate’s decision and energy crisis in some way, including through direct income relief. Moreover, it is all the more important for them to turn to professional advice to fully evaluate options and make the most informed financial decisions.”    

Adrian Anderson, Director of property finance specialists: The Bank of England have increased UK interest rates to 2.25%, this is a 50 basis points hike and takes borrowing costs to their highest levels since November 2008.  

The Bank’s monetary policy committee were split 5-4 on the rate hike.  Experts are anticipating more large rate hikes later in the year and into 2023 which is going to heap misery on mortgage payers and have a severe impact on households’ disposable income.  

The message to mortgage borrowers is very simple – don’t wait, take action now as its likely the situation will get worse in the short term.  Borrowers are actively shopping around and seeking to fix their mortgage payments now before the monthly mortgage pain gets even worse.  

This is a huge reality check. The landscape has changed quickly, we are no longer living in a period of ultra-low interest rates with plenty of disposable income; our outgoings are increasing faster than our income and we are going to have to adjust quickly and get used to the new norm.

Chris Beauchamp, Chief Market Analyst at IG Group: “The doves at the BoE have won out for now, moving rates up by just 50bps. But with the inflation forecast actually cut back slightly perhaps there is ground for the BoE’s hawkishness to drop back a touch. Once again the BoE’s caution has hit sterling, which has dropped again following the decision. Perhaps tomorrow’s government statement will give sterling traders something more positive to think about…”

Kevin Roberts, Managing Director of Legal & General Mortgage Services“Today’s decision to raise the base rate comes as no surprise to those watching the headlines. Inflation and rising energy costs have dominated the news and it’s clear that the Bank of England is committed to fighting this. Of course, these decisions don’t exist in a vacuum and borrowers may be worried about what the knock-on effects of today’s news will be on their future mortgage payments and ability to borrow. For many of these borrowers, or would-be borrowers, this latest worry may just add to serious existing concerns about winter energy costs and a general rise in the cost of living.

“Rates are only one part of the puzzle though, and it’s important to stress that activity in the housing market still remains very healthy. Additionally, many existing borrowers, for instance those on fixed-rate mortgages, won’t actually see any impact on rates until their current deal ends. There might also be help on the horizon for new borrowers, as the government is expected to announce a cut to Stamp Duty later this week. There are then some reasons for positivity, in spite of the headlines.

“As an industry we need to acknowledge though that some borrowers may have difficulty navigating this quickly-moving environment and may be unaware of the support available to them. This is an opportunity for advisers to show their true worth. Good quality financial advice will be crucial in helping borrowers see past the initial headlines and understand what all this news means for their particular situation. Speaking with a mortgage adviser can help borrowers to better understand the options that are available and find a solution that’s right for them.”

Jonny Black, strategic director, abrdn, said: “It is unlikely that this seventh consecutive rise in interest rates will be the final increase of 2022. Inflation and bleak Bank of England forecasts means we can expect more people to turn to their adviser for support.  

“Rash financial decisions are even more dangerous in today’s economic climate. Advisers are stepping up to the plate once more, reassuring their clients and helping them to maintain the balance of investments they need to achieve their long-term objectives.

“And, from a commercial perspective, it is now essential for advisers to take the same long-term view as their clients. They must consider whether their business strategies for everything from pricing to recruitment are suitable for an extended period of high inflation.”

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