What are the implications for investors of today’s UK bank rate hike? Economists and investment experts share their views

by | Feb 3, 2022

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Today’s Bank of England decision by the MPC to rate base rates to 0.5% was hardly unexpected. In this IFA Magazine summary, some of the UK’s leading wealth managers, economists and financial experts share their views on what the implications of today’s hike might mean for investors – and the outlook for the UK economy- as they find a few surprises lurking amidst the Bank’s statement.

Luke Bartholomew, senior economist, abrdn, was particularly tuned in to the fact that 4 MPC members were keen to raise rates further commenting:

“The fact that four members of the Monetary Policy Committee voted for a 0.5% increase will come as a shock to many. Investors and households have got used to quite gradual increases in the level of rates, so the fact that so many policy makers thought a large increase was appropriate today will put markets at notice that more sudden shifts in policy are possible, which will increase uncertainty and volatility. It is also a sign of how concerned the Bank is about the inflation environment. With the announcement today from Ofgem of raising energy prices, inflation will continue to move higher until at least April this year, squeezing household incomes. There is nothing the BoE can do about this short term inflation pressure, but by demonstrating its inflation fighting intent, the Bank is hoping to keep future inflation expectations anchored through this period of high inflation.”

Edward Hutchings, Head of Rates at Aviva Investors, also noted the hawkish skew of four committee members commenting: “With four members of the committee voting for a 50-basis point increase, there is certainly a hawkish skew. Further, with the announcement to unwind the corporate bond purchases, this will turn up the heat and focus on the unwind of Gilt purchases when interest rates hit 1%. This now may well be sooner than when than most investors had initially thought and we could well see gilt yields move further higher from here.”


Russell Silberston, Strategist, Ninety One believes the Bank of England has taken a step into the unknown with the decision to shrink their balance sheet commenting:

“With the Bank of England having adopted a tightening bias last summer, today’s increase in Bank Rate by 0.25% to 0.5% was well flagged and fully discounted by markets, although the dissent by four members of the MPC who preferred a 50bps hike was a real hawkish twist. The Bank’s decision to begin the process of shrinking their balance sheet, on the other hand, is a step into the unknown. Following the Governor’s 2020 Jackson Hole speech, where he discussed the need for quantitative easing to ‘go big and go fast’ in periods of market illiquidity, markets have long known that the flip side of such aggressive action was the need to shrink the balance sheet when conditions return to normal. And the Bank had guided that this process would start when Bank Rate reaches 0.5%. Today makes the start of that process, with the Bank now allowing gilts to mature over the next two years and actively selling down its £20bn corporate bond holdings.

“Quite what happens to financial conditions as the Bank begin the slow process of withdrawing liquidity is highly uncertain. The only major central bank to have recently attempted this was the Federal Reserve in 2018-2019, who were forced to reverse course as demand for highly liquid bank reserves proved far higher than they expected. This experience has injected a note of caution into the FOMC’s view as they, once again, contemplate QT.


“The Bank’s actions therefore warrant close attention. Whilst we believe the Bank of England are the most hawkish major central bank, with market’s pricing in another 100bps of hikes over the next two years, this, coupled with ongoing quantitative tightening, will take monetary policy somewhere it hasn’t been since before the Global Financial Crisis.”

Commenting on the Bank’s decision, Steven Bell, Chief Economist, BMO GAM, said: “The Bank of England also updated their economic prospects, and they present a bleak picture, less optimistic than ours at BMO GAM. Although they expect wage inflation to pick up, it remains below the rising cost of leaving and the resulting real income squeeze will depress overall economic growth. They expect the recent decline in unemployment to go into reverse with the rate rising to 5% at the end of their forecast period.

In consideration of how high base rates will go Bell adds: The truth is that nobody, including the BoE, knows. But even if they rise to 1.5%, a year or so from now, as the market currently expects, they would still be below the 2% inflation target and therefore remain negative in real terms. If the BoE want to put downward pressure on inflation, rates will have to rise considerably further.


“Today’s base rate decision will have important implications for gilts, the UK government bond market. The BoE has been a huge buyer of gilts in recent years as part of the Quantitative Easing programme. That programme has now ceased, leaving the Bank with a vast stockpile of past purchases. Now that base rates have hit 0.5%, they will allow the holdings to run off. That’s a massive change in the supply/ demand balance for gilts and could set yields rising.

“In contrast to previous meetings, the BoE has done a good job of communicating its intentions. The big surprise is that the Committee came close to raising rates by twice as much – four members out of nine voted that way. As a result of this hawkish tilt, gilts fell and sterling rose. Equites dipped but banks gained as higher rates should enable them to boost their net interest margins. We are all on notice that the Bank will raise rates further, if necessary, to control inflation. They will hope that they can achieve this without damaging the economic recovery too much. We wish them well in their task: it won’t be easy.”

Laura Suter, head of personal finance at AJ Bell believes that the bigger surprise was the forecast for where inflation will peak commenting: 


“For once the market and the Bank appear to be aligned, with the market expecting a rise to 0.5% today and an increase to 1.25% by year end. The Bank has confirmed it’s on track to raise rates to 1.5% by the middle of next year, sending out a large signal to the nation that it’s not just going to stop after two increases.

“The bigger surprise buried in the accompanying inflation report is that inflation is now expected to peak at 7.25% in April – leaving the Bank of England’s target of 2% a distant memory. This rate rise comes hot on the heels of Ofgem’s energy price cap announcement, and the Bank is firmly pointing the finger at energy costs for that spike in inflation. Once again commentators will be pondering the impact that interest rate rises will have on limiting inflation, when the biggest contributor is wholesale energy prices – which couldn’t give a hoot about the UK’s Base Rate.”

Georgina Taylor, multi-asset fund manager at Invesco sees a few implications from today’s announcement commenting: 


“This Central Bank meeting reflects very clearly the pressure on policymakers to react to current inflation levels. The first implication of this more reactive policy approach is that there is likely to be a sharper rate hiking cycle by the Bank of England as they play catch up to current inflation dynamics and try and retain credibility in relation to their inflation mandate.

“The risk is that Central Banks are being forced to respond to the here and now, rather than lay out a policy path incorporating forward looking measures of growth and inflation. This dilemma has been laid out clearly by the Bank of England today through the hawkish move by some members of the MPC, alongside forecasts that reveal they expect inflation to fall to below target in three years’ time. The implication of this policy manoeuvre is that they may have to stop hiking very quickly or risk a policy mistake by putting the brakes on the economy too fast and too quickly.

“These rate hikes are happening alongside the UK facing a real income squeeze for households. Getting that balancing act right is a big challenge for the bank of England, therefore despite higher interest rates now leading to potentially higher bond yields, sterling may start to weaken, reflecting the constraint on how far rates can rise in this cycle and also may reflect increasing risks of a policy mistake as we move through 2022.”


Les Cameron, Financial Expert at M&G Wealth, is interested to see whether today’s rise will translate to higher rates available to savers or to increased borrowing costs as he comments:

“With the current high levels of inflation we’re experiencing, a modest increase to savings rates would still mean that most cash or near-cash savers, for example NS&I, would see their wealth being eroded in real terms. Of course many of those with cash savings are pensioners who spend a higher proportion of their savings on energy costs, which we know are increasing at a much higher rate even than the headline inflation rates. The increasing cost of living, as evidenced by the 54% increase in average energy bills announced today, will mean those repaying debt that is not on a fixed rate will no doubt feel the pinch even more if rates rise.”

Alex Batten, Fixed Income Portfolio Manager at Columbia Threadneedle Investments, comments


“The Bank of England raised interest rates today and signalled a greater urgency on the timing of future raises but not on the total amount required. The overall amount of tightening required is still described as “modest” but the time period has been brought forward from over the three year forecast period to the coming months. The four dissents in favour of a 0.5% hike reiterates this urgency.

“However, the forecasts for inflation some way below target, and excess supply three years out, are a strong signal that the Bank of England thinks more than enough tightening has been priced in. The decision to unwind corporate bond purchases by end 2023 and the start of passive unwind of gilts will take some of the burden of tightening policy. We believe today’s actions increase opportunities for investors at the front end of the gilt market.“

Hinesh Patel, portfolio manager at Quilter Investors believes that today’s hike from the Bank may be too late commenting: “The BoE is now making policy on the back foot and there is evidence they may have acted too late. The bad news for consumers is inflation is now likely to hit 7% and will remain elevated for at least the rest of this year. We do expect a sharp decrease come 2023, but this will be of little respite to consumers who are facing a huge increase to their monthly utility bills.


“Energy prices remain the elephant in room with all of this and the Bank will be hoping they don’t keep escalating. The squeeze for the real economy ahead is real and can already see the heart-breaking stories in the news. The Chancellor, like during the pandemic, will need to be ready to step up when required and act in tandem with the BoE to prevent the economic recovery being choked off.

“For investors, what this rate rise means is that they will need to be braced for more volatility in fixed income markets and avoid it where possible. Owning companies that can deal with price shocks will ultimately prevail, meaning quality will remain crucial while we navigate this rocky period.”

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