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Bank of England raises rates by 50 basis points but questions remain

22 September 2022

Some analysts suggest greater hikes are on the horizon, while all eyes now turn to tomorrow’s mini-budget.

By Jonathan Jones,

Editor, Trustnet

The Bank of England (BoE) has raised interest rates by 0.5 percentage points, taking the base rate from 1.75% to 2.25%.

It is the second month in a row that the UK central bank has increased rates by 50 basis points and the seventh consecutive hike, but it is lower than the 75 basis point move anticipated by markets.

Chris Beauchamp, chief market analyst at IG Group, said: “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.”

The Bank is walking a tightrope between getting inflation (which dipped below 10% in August but remains far from its 2% target) back under control and not dampening out fragile economic growth.

Rachel Winter, partner at Killik & Co, said: “The 0.5 percentage point increase shows that policymakers are balancing the real prospect of recession with the impact of an incoming wave of inflationary fiscal stimulus in the longer term.”

Gurpreet Gill, macro strategist of global fixed income at Goldman Sachs Asset Management, said that the Bank will likely raise rates more aggressively in November, with inflation “likely” to peak at around 11% in October.

“In our view, a 0.75% increase in November followed by a 0.5% rise in December is warranted, so that the Bank Rate reaches 3.5% by the end of the year. But of course, the pace of further rate hikes remains highly uncertain given the Bank’s data-dependent approach, divergent opinions within the MPC and the unknown impact on financial conditions from upcoming active bond sales.”

Perhaps the biggest affect the decision had was on the currency market, where sterling plummeted against the dollar.

Beauchamp said: “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.”

Hinesh Patel, portfolio manager at Quilter Investors, added that the BoE had “missed an earlier window of opportunity to, at the very least, dampen the impact on sterling”, leaving it in “a quandary”.

All eyes will turn to the government’s mini-budget tomorrow, with Liz Truss’ new chancellor Kwasi Kwarteng expected to announce a raft of new measures to deal with the cost-of-living crisis.

The Bank’s decision comes after the US Federal Reserve upped rates by 0.75 percentage points on Wednesday evening to the 3-3.25% range.

According to analysts, there had been around an 80% chance of a 75 basis point hike before the meeting last night, with a 20% chance of a 1 percentage point increase, which was based on higher than expected August inflation number last week.

The Fed’s dot plot, which projects future rate rises, shows rates at 4.4% by year-end 2022 and 4.6% in 2023, suggesting that there is another 120 basis points to increase.

Willem Sels, global chief investment officer of global private banking and wealth at HSBC, said he expects the Fed to fall short of this estimate however.

“We think the Fed will continue to raise rates to 4.25% by early next year, but there is a risk that they hike even more: Fed members’ own forecasts see interest rates at 4.6% in 2023,” he said.

“Labour markets are very tight and it is probably only when wage growth slows or unemployment is on an upward trend that service price inflation will drop and the Fed will be able to halt its rate hikes. So unemployment and job market conditions are key to watch, in our view.”

Anna Stupnytska, global macro economist at Fidelity International, said taking a cautious approach seems prudent for investors, with her firm’s multi-asset team maintaining an underweight to equities and bonds and an overweight to cash.

“Within equity regions, the preference is for US equities given their defensive properties despite expectations for continued Fed hawkishness. In credit, we are defensively positioned in higher quality developed markets relative to emerging markets, where we see headwinds from dollar strength,” she said.

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