Bank of England raises base rate by 0.5%: reaction from industry experts

bank of england

Following yesterday’s worse than anticipated inflation data, the Bank of England’s Monetary Policy Committee (MPC) interest rate decision today has been widely expected to end in a further hike – the thirteenth consecutive rise. The question has been – how far will they go? Today’s news that the UK base rate is being increased by 0.5% to 5% will add further pressure to businesses and consumers – especially those with variable rate mortgages – as they struggle to cope with the rising cost of living.

Industry experts have been sharing their reaction to today’s base rate news as follows:

Commenting on today’s interest rate rise from the Bank of England, William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says:

 
 

The Bank of England’s (BoE)rate rise today reflects the fact that inflation now looks to be driven by domestic price pressures – largely stemming from the constricted labour market. Latest data shows salaries (excluding bonuses) rose by 7.2% across the economy, a level inconsistent with the BoE achieving its 2% inflation target. From yesterday’s inflation data, the BoE will also be concerned by the fact that core inflation (which excludes volatile items like food and energy) continued to rise, reaching a 30-year high of 7.1%. In contrast to the price shocks experienced last year which came from external sources, all the above adds to the evidence that the UK is entering a wage-price spiral.

When compared to other economies, the UK is starting to look like an outlier, as inflation is decreasing at a faster rate in the US and euro-zone countries. Consequently, expectations of interest rates surpassing those of the Federal Reserve have increased. As a result, yields on UK government bonds have risen accordingly – UK gilt yields are now almost 0.7% higher than equivalent US Treasury bonds. However, sterling has also been strengthening over the last month as the prospect of higher interest rates and bond yields attracts international investors. Although the market’s expectations of interest rates reaching 6% might be overdone, unless the data improves significantly, it looks likely that there will be additional rate hikes in the coming months. With the level of returns available on holding cash rising, advisers may start to get questions from clients on whether now is the best time to invest. But for advisers, maintaining a long-term view is king, as history shows cash generally underperforms other asset classes over the long run.

On the Bank of England’s decision today, Edward Park, Chief Investment Officer at Brooks Macdonald, said:

 
 

“Yesterday’s surprise CPI release struck a hammer blow to the Bank of England’s efforts to curb inflation. In response, today the Bank announced an outsized 50bps interest rate hike, marking its 13th consecutive rise and a full 0.25% over market expectations. The dovish narrative that has accompanied previous hikes has now been comprehensively put hold as the Bank looks to establish its hawkish credibility in the face of the highest inflation in the G7.

“The market is of the view that Bank of England is losing the battle against inflation, and we continue to see further volatility within UK gilt prices. The UK has now had two above expectation inflation releases in a row, data showing a pay growth that is much stronger than expected and investors have priced in a 6% Bank of England base rate being hit before the end of 2023. This is not only bad news for mortgage holders but the UK Government as it looks to service its debt which has just surpassed 100% of GDP for the first time in over 60 years.

“Looking ahead, bond investors are pricing in a further interest rate hike at the August meeting after seven out of nine of the of the Bank of England’s voting members opted for larger 50bps rise today.

 
 

Ed Hutchings, Head of Rates at Aviva Investors said:

“The Bank of England hiked rates a further 0.50% to make it a staggering 13 hikes in a row. Although the size of the hike was somewhat unexpected, it should not have been too much of a surprise in light of recent inflation and employment data. Once again, the split vote on the decision shows that some MPC members believe taking the rate from 0.10% to 5.0% without a pause along the way is taking things too far. Further to this, with the market still priced for a further 1.0% of hikes, it could still be some time before we do actually see a pause. There’s little doubt that the next six to nine months will prove tough for the UK economy. Today’s hike should now see Gilt yields supported as it is likely we are closer to the end of the hiking cycle. However, with growth likely to get hit going forward, Sterling could face some weakness.”

Richard Ollive, senior financial consultant at Wesleyan, said: “Today’s decision marks the thirteenth consecutive base rate rise, and it’s unlikely to be the last we’ll see.

 
 

“For most people, this means more costly mortgages. Whether on a tracker and feeling the immediate increase in monthly repayments, or remortgaging at the end of a fixed term deal and experiencing a jump in costs, it’s clear that mortgages are becoming challenging for many to manage. We’re also seeing fewer products on the market, with lenders repricing and removing deals at very short notice. Simply, it’s making it hard for consumers to shop around.

“While many optimistically hoped we’d return to a low inflation, low interest rate environment later this year, it looks unlikely. We expect that we’ll see these trends continue well into 2024 before they reverse.”

George Lagarias, Chief Economist at Mazars comments: “A double rate hike was appropriate following yesterday’s bad inflation number. The wage-price spiral won’t break itself. The central bank’s move is a step towards the right direction. Unfortunately, from where we are today, there aren’t many good options. The UK is in a vicious inflation cycle plain and simple. Unless demand is decisively curtailed, there’s a real danger that inflation will get out of hand. Make no mistake, this means significant pain for consumers. The government could step up to alleviate pressures in the labour market and increase housing availability, which should help diffuse the inflation bomb faster. Presently, markets are discounting four more rate hikes, a one percent higher rate by the end of the year.”
Rachel Winter, Partner at Killik & Co, said “With inflation holding firm at 8.7%, the Bank of England had little choice but to press ahead with another interest rate rise. This decision will lead to more pain for those on variable rate mortgages or with fixed deals about to expire, and disappointment for those hoping to borrow to buy a new property. Shares in housebuilders sagged on Wednesday as investors feared that further interest rate rises would reduce demand for homes.   While some have called on the government to assist homeowners with mortgage payments, the latest public borrowing figures made it clear that there is little scope for this. For the first time since the 1960s, UK government debt is worth more than the country’s annual GDP.
The likelihood of further volatility will be of significant concern, however with a dampened stock market comes an opportunity for bullish investors to bolster their portfolios, particularly as share prices remain low relative to last year.”

Jonny Black, Chief Commercial and Strategy Officer at abrdn, Adviser, said: “This 13th consecutive hike takes the Bank of England base rate to its highest level since 2008, underlining how exceptional economic conditions in the UK currently are.

 
 

“Clients have been living with high inflation and sustained rate rises for some time now, and many will be acutely aware that fears of a recession could intensify if the situation doesn’t improve soon. With the picture changing so quickly, they will appreciate reassurance and the opportunity to discuss their long-term savings and investment strategies to ensure as many outcomes are accounted for as possible.

“Advisers can also use technology to support these conversations. For example, during the market turbulence caused by the pandemic, we saw many use cashflow modelling as a tool to position potential changes in income to retired clients without causing alarm.”

Andrew Gething, managing director of MorganAsh said: “With every recent MPC decision came much talk of rates reaching the peak. However, today’s decision in light of sustained inflation, shows that peak may now be some way off yet. Mortgage pressures are claiming many of the headlines at the moment as swap rates react to market expectations and lenders reprice accordingly. With Consumer Duty just weeks away now, financial vulnerability will be key, especially for those on tracker or variable-rate mortgages and those looking to remortgage with higher rate, higher price fixed-rate products.

 
 

“But it shouldn’t be the only focus as Consumer Duty expands the scope of vulnerability firms must consider, monitor and evidence. Being alive to the challenges facing vulnerable customers means considering health, lifestyle and relationship challenges such as divorce, domestic abuse and so many others. Without a consistent way to monitor, it will be much harder for firms to meet the new rules.

“As more consumers potentially fall into the vulnerable category with base rate rises, inflationary pressures and lifestyle changes, there’s no room for complacency when it comes to meeting the requirements of Consumer Duty. While looking after vulnerable customers has long been a priority for many, the expectation is now far greater.”

Alexandra Loydon, Director of Partner Engagement and Consultancy at St. James’s Place comments:

 
 

“This is now the 13th consecutive rise in interest rates and the highest rate, at 5% since the financial crisis in 2008. It is part of the Bank of England’s repeated attempt to control rising inflation, without any certainty that it’s reached a peak, meaning that we see further rate rises are now being factored in. With the OECD already suggesting that the UK will have one of the highest inflation rates for an advanced economy, and with the Bank of England nowhere near its official target of 2%, it’s unlikely it can afford not to look at continuing to raise rates this year.”

“It is mortgage borrowers, particularly those on tracker, standard variable rates (SVR) or variable rates, who are really feeling the direct pain of the continual Bank Rate rises. Borrowing may become more expensive for everyone but those on variable rates will be impacted immediately, so information on the extent of the rise and the affordability of the mortgages is essential. Those nearing the end of a fixed term deal should shop around to secure the best rates they can, but if mortgage holders foresee that costs may be unaffordable, they should engage sooner rather than later with their provider.”

“In fact, placing continual pressure on consumer and commercial borrowers may put the economy into recession without providing sufficient relief to the cost-of-living crisis.  For those struggling with the  cost-of-living, the best advice is to understand the impact on outgoings, costs and monthly financial commitments and plan how to tackle them as best you can.”

 
 

“Having sustained higher interest rates should encourage saving rather than spending, but it’s proving a challenge, both to curb spending and for companies to resist higher than inflation pay rises. Savers should look across the market to the highest savings rates, as we know that savings providers don’t always pass on the increase or, if they do, they are slow to do so. The key is to shop around and be prepared to lock up your money for longer, if that’s an option to secure a higher rate.”

Garry White, Chief Investment Commentator at Charles Stanley, comments:

“Mortgage holders need to prepare for more pain ahead, as persistently high inflation means even more interest rate rises are likely in the coming months. Markets are now pricing in interest rates hitting 6% by the end of the year, though this could be an overly hawkish stance. Rising mortgage rates, coupled with continuing price rises in goods and services, will act as a sharp brake on the UK economy, as households rein in spending. The impact of the mortgage squeeze on consumer incomes will lead to the underperformance of UK growth compared to the more favourable GDP growth forecasts that have emerged.”

 
 

PensionBee Director of Public Affairs, Becky O’Connor, commented:

“This much trailed interest rate rise will feel like a death sentence to hundreds of thousands of mortgage borrowers with loans coming up for renewal.

For people approaching or in partial retirement who still have mortgages, it could mean working for even longer or even increasing hours again.

The upside for those who are about to retire with a decent enough pension pot and who want guaranteed income when they stop work is that annuity rates are relatively high and edging higher.

Retirees or older workers with a lot of savings amassed could also enjoy higher savings rates on money held in cash accounts – but they will need to shop around for those rates, as not all banks and building societies are passing the increases on.

Head of Interest Rate Trading at Validus Risk Management, Shane O’Neill comments: “After inflation surprised to the upside yesterday, and core inflation proved to be continuing higher, all eyes were on the Bank of England to see whether they would stick with the expected 25bps hike or would the gravity of the inflation situation push them toward starker action. As it transpired the MPC voted 7-2 in favour of a 50bps hike, taking the base rate to 5%. The MPC acknowledged that the recent price and wage pressure would likely take longer to unwind than they did to emerge.

“These sentiments, alongside the surprising voting split and the size of the hike make this meeting unequivocally hawkish. The market now expects the base rate to climb above 6% by year end and stay there well into 2024. It wasn’t long ago, following the Truss budget, that the BoE all but assured markets that rates significantly above 5% weren’t likely due to the effect on the economy – this only goes to show how dire the inflation situation has become.

“Homeowners will read today’s release with concern as thousands of household mortgages come up for renewal in the coming months – up until now the housing market, and economy at large, has remained resilient, time will tell whether this will continue with interest rate increases showing no signs of pausing.”

Mike Stimpson, Partner at Saltus looks at how the interest rate rise and stubbornly high inflation means people need to think more carefully about how to balance their debts and assets, and how the decision could be good news for investors:

The decision of whether to allocate cash to pensions, investments, or mortgage overpayments has become considerably more difficult as interest rates have risen. Those with sizeable debts should carefully consider whether paying down debt is a more effective use of cash. However, they should be cautious in doing so if their long-term retirement plans are significantly impacted as a result.

“With Key Later Life’s research revealing fewer of those aged over 45 are now looking to downsize, your home is unlikely to be the answer to a comfortable retirement. An adviser can help calculate the long-term trade-offs between paying down debt and meeting your retirement objectives by creating a bespoke cashflow plan.

“With regards to portfolios, the persistent inflation data and subsequent interest rate rises offer new opportunities in fixed income, in some cases opportunities that haven’t been around since the Global Financial Crisis.

“In equities, the backdrop is a lot more obscure. On one hand, higher inflation has boosted corporate profits and taken valuations off their highs, however the remedy for higher inflation is higher interest rates. In order to quell inflation, consumption and spending need to be reduced, at the margins, and that will undoubtedly flow through into corporate profits.” 

Simeon Willis, CIO at XPS Pensions Group commented:

“In general higher yields are having a beneficial impact on pension scheme funding levels, due to falling liability values. Longer term inflation expectations have been relatively stable in recent weeks so pension schemes and sponsors are generally benefitting from current conditions, but this should not be confused with a good news story. Better funding levels usually equate to more secure pensions for members.

However, in this instance the benefit of rising rates has come, to some extent, at a direct cost to members, whose benefits have lost real purchasing power. Some schemes may consider discretionary awards to compensate members, but many are not in sufficiently strong financial positions to consider this. The rise in interest rates that pension schemes have waited over a decade for, has turned out in many respects to be as dismaying as the low interest rate environment that preceded it.”

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