The monetary policy committee of the Bank of England (BofE) has announced a 25 basis point increase in interest rates, taking the Bank rate up to the 14-year high of 4.25%. It was the 11th consecutive hike since December 2021.
The decision to continue on a hawkish path was unanticipated up until yesterday’s consumer price index (CPI) reading, which came in higher than expected and shattered hopes for a tightening respite.
The BofE continues to be focused on taming inflation, but the 0.25 percentage point rise is an attempt at balancing the need to rein in prices while avoiding the risk of destabilising the economy.
In the uneasy territory that the UK is treading, experts called for more caution and flexibility.
Neil Birrell, chief investment officer at Premier Miton Investors: “Clearly the CPI number will be at the front and centre of the committee’s thoughts, but the problems in the banking sector and tightening credit conditions will be a focus as well.”
The recent turmoil in the banking sector was also addressed by the committee, which reassured on the soundness of UK banks. None of these issues are going away in a hurry, however, continued Birrell.
“The tightrope they are walking with policy has got tighter over the last two weeks. The need to beat inflation is paramount but policy needs to remain flexible,” he said.
Karen Ward, chief market strategist EMEA at JP Morgan Asset Management, said that the BofE should refrain from offering guidance about the future of policy rates.
“Over the past year they have frequently signalled a view that they expect interest rates to peak at current levels but then the inflation data has proved otherwise. They should leave themselves degrees of freedom by merely stating they will do whatever it takes to bring inflation down,” she said.
Predictions that CPI would fall to 2.9% by December, made by the Office of National Statistics in the Budget last week, are now in question, according to Garry White, chief investment commentator at Charles Stanley.
“This data makes that target look ambitious,” he said. “This means there may be at least one more rate rise ahead, but we are probably close to the top of the cycle. However, if this 2.9% target is to be met, interest rates may not be coming down for quite some time.”
This situation is intolerable to Charles White Thomson, chief executive at Saxo UK.
“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,” he said.
“The UK continues to underperform its key counterparties and have underserved the majority and their aspirations. Change is required.”
A number of commentators are advocating for a pause, including Gurpreet Gill, macro global fixed income strategist at Goldman Sachs Asset Management.
“We continue to see a case for a pause after today given the expected drag on growth from past policy tightening and recent financial market volatility,” he said.
“Big picture, the UK economy has contended with a series of large supply shocks in recent years, including Brexit, the pandemic, the energy price shock and decline in labour supply. These headwinds are fading to varying degrees and supply side reforms included in the Spring Budget support the case for better outcomes on inflation ahead.”
Whilst today’s news will be met with mixed reactions across the board, Rachel Winter, partner at Killik & Co, said a dampened stock market “does present a good opportunity for bolder investors to bolster their portfolios whilst prices remain low relative to last year”.
The environment will also benefit savers, said Rio Stedford, financial planning expert at Quilter. Savers may hope for better returns on savings accounts as banks and financial institutions adjust their interest rates in line with the Bank of England's base rate.
The rise in interest rates can also have a positive effect on annuity rates, which are closely linked to government bond yields, Stedford explained.
“Higher interest rates generally lead to higher bond yields, which in turn lead to better annuity rates. This means that retirees who are about to purchase an annuity could receive a higher income throughout their retirement,” he said.
“Individuals nearing retirement should closely monitor interest rates and bond yields and consult with a financial adviser to determine the best course of action when considering purchasing an annuity.”
The picture is different for variable-rate or tracker mortgages, who will have seen their monthly bills creep up as the Bank of England has ratcheted up rates eleven times in a row now.
Finally, debt and credit cards could also become more expensive.
“As the Bank of England raises its base rate, credit card users may see an increase in their card's interest rate, making it more expensive to carry a balance. To minimise the impact of increased interest costs, cardholders should consider paying off outstanding balances as quickly as possible or explore balance transfer options to take advantage of lower interest rates,” Stedford said.
Individuals with outstanding debts, such as personal loans or car loans, may face higher interest costs in a new interest rate environment as well.