After yesterday’s shock rise in the rate of UK CPI inflation to 10.4% and the US Federal Reserve Bank (The Fed) rate hike of 0.25% yesterday, today’s base rate announcement revealed that the Bank of England’s MPC are hiking rates by 0.25% to the highest level since 2008 at 4.25%. It’s clearly a key decision for the UK economy – and especially so for the financial services profession. Sterling has rallied on the news.
As well as the ongoing battle against inflation, the recent banking stresses stemming from the collapse of a few smaller US banks as well as the arranged marriage between UBS and Credit Suisse over the weekend, the MPC have had much to consider as they weighed up this month’s rate decision. The impact of such a sustained period of rate hikes has had major impact on banks – as well as on consumers around the world. Today’s decision – a tricky one for the MPC – clearly has implications for borrowers, especially those on variable rate mortgages, as well as savers and investors across the UK and all of us affected by the cost of living crisis. But with forecasts that inflation is set to fall, plus the risk of further financial turmoil – there is much to consider in terms of the implications of today’s decision. This is reflected in the 7/2 decision profile revealed.
Commenting on today’s Bank of England announcement, advisers, investment experts and economists have been sharing their views with IFA Magazine as follows:
Nathaniel Casey, Investment Strategist at wealth manager Evelyn Partners, said:
“The split in voting is indicative of the tricky state of affairs confronting the MPC and other central banks, with committee members having to weigh the fragility of the global banking sector against the need to bring inflation back to target.
The recent turmoil in the banking sector, which began with collapse of Silicon Valley Bank (SVB) nearly a fortnight ago, has reminded central banks that things can break when monetary policy is rapidly tightened. Although contagion risks from the tech bank crisis and Credit Suisse look to have receded for the time being, the BoE will need to tread carefully if it decides to further tighten monetary policy from here. The Bank recently acknowledged that ‘more sharp moves in asset prices could expose weakness in parts of Britain’s financial system’ in a letter to lawmakers.
“As its primary objective is bringing inflation back towards target, the MPC had little choice but to raise again, as the evidence has been pointing towards continuing price pressures. Yesterday’s inflation data will have ruffled a few feathers among hawks, with the consumer prices index showing that inflation re-accelerated in February with headline and core CPI posting gains of 1.1% and 1.2% respectively for the month.
“The annual rate ticked back up to 10.4% which was a jolt to what the majority of observers had assumed would be a steady downward trajectory for inflation this year. The Bank itself has forecast the annual rate to be around 4% by the end of 2023, which is less ambitious than the OBR’s recent forecast of 2.9%.
“Moreover, the labour market continues to remain tight, putting pressure on wage growth which could further stoke inflation and cause it to become entrenched.
“And finally, for the real economy, recent UK data has been surprising on the upside. February’s PMI readings came in well above consensus with the composite figure reported at 53.0, consistent with a recovery in economic growth. Growth expectations are likely to get a boost as falling energy prices feed through to a reduction in household expenditures, boosting real incomes and stimulating the economy. A boost to growth could cause the inflation to decelerate slower the than the BoE’s forecasts currently expect, which may cause monetary policy to remain tighter for longer in response.”
Tommaso Aquilante, Associate Director of Economic Research at Dun & Bradstreet said:
“Stubborn headline and core inflation in February lead the Bank of England to press ahead with rate hikes. There are however good reasons to think that inflation will drop sharply in late 2023 to reach a new and happier medium. Booming energy prices and supply chain bottlenecks that contributed to the surge in inflation in 2022 are now gradually subsiding, and the steep price increases experienced last year won’t factor into this year’s inflation calculations.
“It’s worth keeping in mind that even if inflation drops to 2.9%, in line with OBR’s prediction, inflation would still be an eye watering 6% or higher year on year. This in turn will continue to have a negative impact on households’ finances and UK businesses’ purchasing power, and put pressure on businesses costs of the course of the year. In fact, more than a third (37%) of businesses we surveyed asserted that the overall cost of doing business this year would be a huge challenge.
“Businesses are going to have to focus on how they can remain resilient, productive and competitive as this turbulent period continues. Business liquidations are on the rise, costs remain high and financial conditions continue to tighten. This is where quality data insights can be useful to assess both risk and growth opportunities. Doing so can provide a competitive advantage and bolster business resilience.”
Commenting on The Bank of England (BOE) interest rate rise, Melanie Baker, senior economist at Royal London Asset Management said:
“The Bank of England’s MPC continues to signal a meeting-by-meeting data dependent approach to policy setting. According to the minutes of today’s meeting, if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.
“A number of things sound like they have played into their decision to hike rates today, including the recent Budget and a more optimistic near-term picture for the economy, as well as the recent upside surprise in headline inflation and a still tight labour market.
“Despite today’s rate hike, their commentary around inflation was somewhat dovish. That included noting that services inflation was broadly in line with their expectations – in relation to the recent upside surprise in inflation, most of the surprising strength in the core goods component was accounted for by higher clothing and footwear prices, which tend to be volatile and could therefore prove less persistent.
“For now, I am sticking to my forecast of one more 25bp rate hike from the BoE. However, I see risks to that forecast on the upside as well as on the downside given still-strong domestically-driven inflation.”
Commenting on the latest moves, Van Luu, Head of Currency and Fixed Income Strategy for Russell Investments said:
The UK economic outlook has brightened somewhat compared to late last year. Next month, around 20 million adults will benefit from a 10% uplift in their state pension, universal credit or living wage, easing the cost-of-living challenge. The extension of the energy bill support announced in last week’s budget and the decline in wholesale energy prices will also lessen the burden on households.
On the flipside, much of the dampening impact of the interest rate hikes since late 2021 has not yet been felt. Higher bank rates are still working their way into mortgage payments as mortgage deals come up for renewal. A standard 2-year fixed rate mortgage was at 1.2% in September 2021, reached a peak of 6% after the gilts crisis in the autumn of 2022 and is now at 4.8%. Housing has softened, with approvals of new mortgages dropping sharply, but is likely to weaken further. While the economic outlook is not as bleak as a few months ago, tepid growth and rising unemployment are still ahead.
The bank failures in the US and Switzerland in recent weeks will likely influence monetary policy. Central banks are going to be more mindful of the impact their tightening has on financial stability and the ability of banks to extend credit.
Today we may have seen the last rate hike in this cycle taking the bank rate to 4.25%. Mortgage borrowers will breathe a sigh of relief, as will bond investors. We believe that the pain for UK gilt investors is mostly behind us. In foreign exchange, the pound sterling is still cheap and could continue to gradually rise against the dollar, especially if the Fed is also approaching the end of its rate hike cycle.
Jonny Black, Strategic Director at abrdn, Adviser, said: “Following yesterday’s inflation announcement, advisers and clients will have been eager to see what direction the Bank of England would go with interest rates.
“And while the Chancellor painted a rosy picture on future inflation rates, today’s rise shows that the Bank still believes some form of action is necessary to slow price rises down.
“Today’s base rate rise could prompt fresh conversations around investment strategies. Advisers will need to ensure that clients still have the best chance of making their money work towards their long-term strategies, and to adjust course if necessary.”
Richard Carter, head of fixed interest research at Quilter Cheviot said: “After Tuesday’s inflation figure, the Bank of England had no choice really but to raise interest rates today. It will have been somewhat spooked by inflation rising, and it makes the prediction that inflation will stand at just 2.9% by the end of the year even more difficult to achieve. However, the contagion in the banking system appears to have been contained for now, giving it some cover to raise rates today without being overly concerned it will tip the balance for any banks that are under duress. Furthermore, the UK banking system has much more stringent regulation and capital adequacy rules so the system should be able to handle this rate rise.
“Going forward, it will be hoped this will be the final rate hike before a period of pause to assess how the rate hikes are taking effect. Prior to the surprise inflation stat, there was growing divergence in the Monetary Policy Committee about the most appropriate way forward with rates, particularly given the economy is expected to contract this year though miss falling into recession. Ultimately, inflation continues to be the key driver of interest rates and this will continue to be the case unless the recent banking issues transforms into a full-blown crisis. Inflation is proving sticky so it is hard to say if this is the end, but consumers up and down the country will be hoping for some relief when the Bank of England sets rates again in May.”
Andrew Gething, managing director of MorganAsh said: “While it seemed like inflationary pressures were continuing to ease, the news of a surprise jump in inflation last month was clearly enough of an excuse for the Bank of England to make another increase. Without this, the expectation was the MPC would look to hold rates, signalling that this may well be the last for a while.
“This will be of little comfort though to the more than 1.6 million households on either tracker or variable mortgages. Thanks to today’s decision, they will once again see an almost immediate impact on their monthly mortgage payments. That’s on top of a rise in other outgoings, mainly food costs.
“At all levels across financial services, it’s once again a reminder that firms must be alive to challenges facing those vulnerable customers who will be most susceptible to harm. After all, the upcoming Consumer Duty regulation brings with it the obligation to not only identify but monitor the vulnerable characteristics of all customers throughout the lifetime of the product.
“This goes far beyond financial vulnerability to include all potential health, lifestyle and relationship issues. Without the correct data, processes and technology in place, firms cannot mitigate the risk of harm, deliver fair value or ensure good outcomes for customers – key requirements of the regulator. The prospect of a pause in rate rises in the future will not be enough to stop more borrowers potentially falling into the vulnerable category.”
Charles White Thomson, CEO at Saxo UK, said: “The UK is in an economic danger zone. I am an advocate for bold plans which will unlock the UK’s potential and to break the high tax and low growth loop, but the status quo is increasingly painful and uninspiring, and this should not be about celebrating recent monthly GDP growth of an anaemic 0.3% and the avoidance of a technical recession. The UK continues to underperform its key counterparties and have underserved the majority and their aspirations. Change is required.
“As opposed to talking of the Chancellor and Government, I prefer to continue referring to the UK as a PLC. Instead of Prime Minister we have a Chief Executive Officer and for the Chancellor, a Chief Financial Officer. My resounding conclusion from the UK PLC’s recent financial statement – or budget – is that the management team are in an unenviable position in that there is little wiggle room for large change. The UK PLC is effectively in a financial straitjacket with constraints including: £2.4 trillion public debt and all the servicing costs this entails, tax to GDP levels approaching record highs or 37.5% and corporation tax moving to 25% from 19% for financial year 2023/24. Financial outlook statements for generations of UK PLC management have concentrated on the status quo as opposed to a more dramatic plan to seriously kick start growth, confidence, and the all-important upside this brings.
“We have an advantage in that UK PLC is the sixth largest global company or economy in the world with all the scale and reach that this brings. This is about a bold and large plan to ensure that we deliver on its full potential and unleash the prosperity that a large part of the UK shareholders want. The alternative to a bold and wide changing economic plan, which is not purely based on industrially low interest rates and quantitative easing, is continued stagnation and underperformance. This will not be easy, but the alternative is to sell out the next generation which should never be a consideration.”