The first interest rate hike in a decade has largely disappointed the investment community, with some commentators suggesting it was “unnecessary”, “odd” and provided a “grim” outlook for the economy.
On Thursday the Bank of England voted to raise interest rates to 0.5 per cent from 0.25 per cent, reversing the rate cut made in response to the UK’s decision to leave the European Union in June last year.
Monetary Policy Committee (MPC) members voted 7 to 2 in favour of the hike, which was largely priced into the market after months of signals from governor Mark Carney.
The rate hike was largely in response to rising inflation, which last month saw the Consumer Prices Index (CPI) edge higher to 3per cent, according to the ONS, reaching a 5.5 year high.
Inflation expectations fan chart
Source: Bank of England
However, comments from the governor in his press conference and accompanying report have underwhelmed, with many suggesting that the BoE will not raise rates any further.
While Carney said the market may be under-pricing future tightening, he referenced the market pricing in two rate hikes over the next three years suggesting that another rate hike is not planned any time soon
As well as this, the governor noted that Brexit remains an issue and that unless there is greater clarity on the deal the committee are likely to take a gradual pace to interest rates.
“We may be jumping to the wrong conclusions prior to the press conference with Mark Carney but the impression that the MPC has given is this is a ‘one and done’ rate hike,” Craig Erlam, senior market analyst at Oanda, said.
The reaction to this has been mixed, with sterling dropping more than 1 per cent against the US dollar, UK gilt yields falling to 1.28 per cent and the FTSE 100 moving higher.
Below, FE Trustnet rounds up some of the reactions from market commentators and industry experts and looks at what the news means for investors.
Ben Edwards – Carney likely disappointed by market reaction
The manager of the BlackRock Corporate Bond and BlackRock Sterling Strategic Bond funds said that Carney will likely have been hoping for a more positive reaction from markets than he received.
“Assuming that the Bank of England’s intention to hike for the first time in a decade was at least partially to introduce some risk of higher borrowing costs into the minds of market participants and UK consumers, the initial reaction will come as a significant disappointment to Mr Carney,” he said.
“The pound fell, UK government bonds rallied and pricing for the next hike has been pushed out. Might this be a classic ‘buy the rumour, sell the fact’ or a vote of no confidence in the precarious state of the economy and the Bank’s ability to embark on any kind of real tightening cycle?
“He will, no doubt, look to dampen the view that this is ‘one and done’ but the reality has not changed: Brexit negotiations will determine much of the fate of the economy and the pound, and he has little scope to control either over the next 12 months.”
Toby Nangle – it sends a grim message for UK growth potential
The head of multi-asset for EMEA at Columbia Threadneedle Investments said the rhetoric surrounding the hike suggests the Bank is worried about the growth potential of the UK. 
Traditionally, interest rate hikes dampen growth, with the cost of debt increasing leading to a squeeze on consumer spend.
“The market had almost fully discounted the increase in interest rates that the Bank of England voted 7-2 to make. This would typically mean that there would be little reaction,” Nangle (pictured) said.
“However, the immediate market reaction has been for the pound to fall by over 1 per cent against all major currencies and for UK bond yields to fall sharply.
“The reason for this reaction was that the Bank dropped the line from its statement that rates may need to rise more than the market expects and this was interpreted by the market as removing some risk that this was the first of many rises to come.
“The Bank furthermore judged that despite lacklustre economic growth, the UK has been growing above its speed limit, sending a grim message to the market around its expectation for potential UK economic growth.”
Neil Wilson – further expectations are meaningless
ETX Capital’s Wilson, who earlier this week examined the consequences of an interest rate rise, said the news was “as dovish a hike as you get”.
“A hike was telegraphed but what was less certain was whether this would be the start of a tightening cycle or one-and-done,” he said.
“From the cautious language, it’s more like one and wait-and-see. Further hikes will be ‘at a gradual pace and to a limited extent’.
“With Brexit weighing on the outlook, this could just as easily be reversed next year. Brexit poses such a fundamental risk to the economic outlook to some extent the interest rate expectations are somewhat meaningless.”
Anna Stupnytska – an odd rate hike
Fidelity International’s global economist said the decision to raise interest rates was an odd one and that the dovish rhetoric suggests an incredibly slow hiking cycle at best with a likelihood of even less if the “considerable risks” that the BoE sees from Brexit materialise.
“The BoE had painted itself into a corner by talking up the possibility of a November hike, having gone back on its word too often in recent years,” she said.
“It may have been intended to put a floor under sterling and fire a ‘warning shot’ against some pockets of excessive credit build-up.
“It may have been a way of placating the more hawkish elements on the board, knowing that one hike alone is unlikely to have a material impact on the economic outlook.
“However, with the UK already slowing and Brexit likely to have a significantly detrimental impact on domestic demand, it is hard to see the BoE hiking again for a long time.”
Sajiv Vaid – don’t buy into the bond rally
From an investment perspective, Vaid, said investors should not overreact to the change in gilt yields, which fell 10 basis points.
The co-manager of three funds, including the £4.1bn Fidelity Moneybuilder Income fund, said the “fairly aggressive reaction” suggests market expectations were broadly for a more hawkish BoE reasoning and outlook.
“This support for gilts may well overshoot in the very immediate future, as additional short positions may have to throw in the towel, but the market should ultimately settle not far from current levels before any new information is received,” he noted.
“Despite the buoyant reaction to the BoE statement, we remain cautious on current credit valuations where we believe the levels have gone a long way to pricing this benign backdrop that central banks have successfully engineered over the last 18 months.
“Our caution has meant we are focusing more on alpha and high conviction views within our credit portfolios rather than a beta led strategy.”
Adrian Lowcock – three equity fund ideas
With the outlook for the UK remaining subdued following the interest rate hike, the Architas investment director said investors should ensure they are diversified across global equity markets.
For those looking to hold some UK exposure, he suggested the five crown-rated CF Lindsell Train UK Equity fund, run by FE Alpha Manager Nick Train.
“Manager Nick Train believes there are a collection of UK companies with excellent brands, franchises and unique market positions, which can reward investors handsomely over the long term, such companies tend to be globally positioned so will be protected from any weakness in the domestic UK economy whilst benefiting from overseas earnings,” he said.
Performance of funds over YTD
Source: FE Analytics
Elsewhere, Lowcock also highlighted Sarah Whitley and Matthew Brett’s four FE Crown-rated Baillie Gifford Japanese fund as a potential option for investors.
“Corporate Japan is growing strongly and structural change is starting to have an impact on the region, add in attractive valuations and a stable political outlook and Japan looks primed for stronger growth,” he noted.
The final suggestion is the RWC Global Emerging Markets fund, run by John Malloy, which he said is focused currently on China and is “well positioned to benefit from the success of China or avoid the region if the outlook sours.”