- BoE raise rates to 2.25% from 1.75%.
- Markets think rise to 2.5% is likely, biggest since 1989.
- New UK PM’s energy price caps will limit peak inflation.
- Fiscal stimulus may sustain longer-term price pressure.
- Fed hike pushes sterling to weakest since 1985 vs dollar.
Economists are expecting the Bank of England (BoE) to raise interest rates from 1.75% to 2.25% in order to counter inflationary pressures. Inflation has been on the rise in recent months, driven in part by higher energy prices. The BoE is widely expected to follow suit with a rate hike of its own, likely taking place in May. A higher interest rate would make borrowing more expensive and could help to cool down the economy. However, it would also put pressure on consumers who are already struggling with high levels of debt. As a result, the BoE will need to weigh the risks and benefits of raising rates before making a decision.
The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in an attempt to combat soaring inflation amid the cost of living crisis.
That’s the seventh consecutive increase in Bank Rate in a row, but a smaller rise than many City investors had expected.
Today’s rate rise — the second 50bp increase in a row – shows that the Bank is trying to prevent inflation becoming persistently embedded, despite concerns over the economy.
The decision by the Bank’s monetary policy committee takes rates to the highest level since 2008.
Charlie Huggins, Head of Equities, Wealth Club:
“A second 0.5 percentage point increase to the base rate in seven weeks will pile further pressure on consumers and businesses, at a time when many are already being strangled by the cost-of-living crisis.
The MPC will feel its hand was forced. The new Tory government is opening the fiscal taps, while on the other side of the pond, the Federal Reserve is tightening the monetary screws. Both factors have compounded pressure on sterling, which is trading at its weakest level against the dollar since 1985. A weak currency only fans the flames of inflation, given the UK’s reliance on imports.
The Bank of England is stuck between a rock and a hard place. A gentler approach to rate rises risks sending sterling into a tailspin, and seeing inflation get even further out of control. But too much tightening could easily choke the life out of the economy, without significantly easing the cost-of-living crisis. It’s a horrible balancing act, with seemingly no good outcomes.”
Paresh Raja, CEO, MFS:
“The property market is being pulled strongly in two different directions. Today’s interest rate hike is significant, impacting both prospective homebuyers along with existing mortgage customers; this threatens to act as a bucket of cold water on what remains a red-hot market.
“But then, the strong rumours of a stamp duty cut in tomorrow’s mini budget will spin matters in another direction. Coupled with the decision to scrap affordability tests, it is clear that the Government will do all it can to fuel a lucrative, buoyant property market.
“We saw it with the stamp duty holiday during the pandemic – when backed into a corner, the Conservative Government is keen to err on being pro-property. It will be fascinating to watch how rising interest rates and high inflation play off against the touted stamp duty cut. I suspect, as recent years have shown, the property market will continue to thrive in the face of significant demand and limited supply.”
Jatin Ondhia, CEO, Shojin:
“The continued rise of interest rates will naturally cause a stir across financial markets. It’s clear the Bank of England is fighting inflation six ways to Sunday – it is unlikely to remove its foot from the economic brake pedal for the foreseeable future. So, even though we have grown somewhat accustomed to it, the turbulence of rising rates and inflation will spook some investors.
“When it comes to navigating the testing climate, agility and diversification will be particularly important. This is no time for knee-jerk decisions, yet at the same time, a laissez faire approach could leave investors over-exposed to the current macroeconomic headwinds. Investors must have the foresight to evaluate their strategies against the complex dynamics at play and consider which assets are likely to offer the best shelter.
“Against the current backdrop, it should be expected that many investors will look to balance traditional and alternative investments. Real estate could prove particularly popular if indeed the Chancellor does announce a stamp duty cut in tomorrow’s mini-Budget. Bricks and mortar always attract significant demand from domestic and international investors, but I would predict this demand will rise notably if tax incentives are introduced.”
CEO of Alliance Fund, Iain Crawford, commented:
“Another base rate increase was anticipated, albeit delayed by a week, and while a half a per cent jump may certainly seem cause for concern, the cost of borrowing remains very palatable for those looking to invest their hard earned money into bricks and mortar.
Despite the wider pressures of economic uncertainty and the increasing cost of living, we’ve seen an unwavering level of buyer demand continue to cultivate positive house price growth across the UK market and we can expect this buoyancy to remain for the foreseeable future.
The real issue facing the nation’s homebuyers at present isn’t the increased cost of securing a mortgage, but the lack of suitable stock available to them when looking to buy. Unfortunately, the government looks set to keep their head in the sand in this respect, ignoring the burning issue of housing supply and instead choosing to fuel demand with a cut to stamp duty.”
CEO of Octane Capital, Jonathan Samuels, commented:
“While generations of homeowners have only ever experienced a sub one per cent base rate, they are quickly becoming accustomed to the increasing cost of borrowing with a seventh consecutive increase by the Bank of England today and the largest jump in some years.
The average homebuyer is already paying between two to three hundred pounds a month more on the cost of their mortgage versus the end of last year and we’ve already seen many lenders preemptively react to today’s delayed increase so this cost is unfortunately set to climb even further.”
Founding Director of Revolution Brokers, Almas Uddin, commented:
“Not only is the cost of repaying a mortgage our most substantial household outgoing, this cost has also seen the second largest increase in the last year, with just energy bills increasing at a higher rate.
This is, of course, a worry for many homeowners who are already stretched thin financially and have one eye on next month’s energy cap increase.
The bad news is that yet another base rate increase will do little to ease the current situation and so those currently looking to buy, or those on a variable rate mortgage, can expect the cost of borrowing to continue to climb.”
Managing Director of Barrows and Forrester, James Forrester, commented:
“Increasing interest rates are certainly a worry for homebuyers who are now seeing an end to the prolonged period borrowing affordability enjoyed for many years.
However, interest rates still remain historically low and the property market continues to go from strength to strength. So while the current cost of living crisis may cause some to think twice before climbing the ladder, it remains one of the smartest and safest investments you can make, despite the increasing cost of repaying your mortgage.”
Director of Benham and Reeves, Marc von Grundherr, commented:
“Not only has the cost of running our homes increased dramatically in recent months, but the temptation to over borrow while rates were low is now coming back to haunt many homeowners.
Those who purchased a property during the pandemic market boom and have come to the end of their fixed mortgage term, as well as those on a variable rate mortgage, are now being hit with both barrels as the monthly cost of their mortgage climbed considerably.
However, while this is sure to add a degree of caution going forward, it’s unlikely to dampen the appetite of the nation’s aspirational homebuyers, which will ensure that the property market remains resolute despite the wider economic landscape.”
Managing Director of HBB Solutions, Chris Hodgkinson, commented:
“We’ve seen interest rates increase consistently since the first rise in December of last year and while this is yet to rock the boat where house prices are concerned, a seventh consecutive increase will have homebuyers feeling a little queasy, to say the least.
An undertone of economic uncertainty has already dampened buyer appetites to some extent and with the cost of borrowing now substantially higher than it was just a few months back, we can expect the level of buyers entering the market to decline.
When this happens, home sellers will find that they may well have to lower their asking price expectations and this period of adjustment is likely to be an uncomfortable one, with sales falling through due to the market turbulence caused.”
Giles Coghlan (Chief Market Analyst, HYCM) said:
“The Bank of England’s (BoE) decision today to raise the base interest rate by 50bps was a disappointment to the STIR markets that saw a 93% chance of a 75bps hike. This resulted in an immediate GBP sell off following the BoE’s release. With inflation at its highest level since the early 1980s, the Monetary Policy Committee (MPC) have to act decisively to try and tackle problematic inflation.
“However, by being too aggressive on inflation, there is a danger that the BoE stagnates UK growth, which is perhaps why the BoE took a more conservative approach today. Since their last meeting, Liz Truss has unveiled her emergency energy package which is projected to cost around £100 billion. According to Governor Bailey, the UK energy price guarantee will significantly limit further inflation, supporting demand relative to August’s forecasts. With the Fed raising their base level by 75bps last night for the third time in a row, and raising the terminal rate to 4.6% vs the prior terminal rate of 3.8%, the BoE may have resisted the urge to follow suit to be more mindful of the coming UK recession.
“With the pound already on its knees, there is a danger that the BoE’s decision creates a stagflationary environment in the UK by hiking rates as growth is slowing. With this in mind, the performance of GBP following today’s decision should be keenly monitored by all investors as there is still more of a sell bias in place for the GBP moving forward. All eyes now turn to the mini-budget tomorrow.”
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’The starting whistle has been blown on the economic tug of war between the Bank of England and Liz Truss’ government. This is a more prudent pull on the on the monetary policy rope than had been widely expected. Even so, as it’s the seventh rise in quick succession, it still shows determination by the Bank to pull inflation down from stubbornly dangerous levels in terms of financial stability. Rates have raced up from 0.1%to 2.25% in less than a year, representing a sharp increase in borrowing costs, on top of the painful rise in energy and food prices.
Policymakers are digging in their heels and will be bracing for the counterattack from the Treasury, with Chancellor Kwasi Kwarteng widely expected to be hanging tight on his resolve to cut taxes to try and stimulate growth, with the mini-budget set to be announced tomorrow. Team Bailey at the Bank of England want to squeeze demand out of the economy, to try and stop the spiral of prices, while Team Truss want to stimulate it, risking prolonging the pace of rate hikes.
The Bank of England’s strategy may be unprecedented, but it’s recently become a well-trodden path, and up ahead the US Federal Reserve is leading the way, having raised rates by 0.75% for the third time in a row yesterday, and signalled there were more robust hikes to come. There may have been some dissent around the table at the Bank of England, about the size of the rate hike, but there is unanimity about the direction of travel, given that inflation is set to peak at 11% in October. The warning is clear – if inflation continues to be persistent, policymakers won’t hesitate to respond much more forcefully.
The pound has been suffering as the dollar has gained more strength amid expectations the Federal Reserve will keep staying ahead of the pack. If the Bank of England relaxes its grip in rate rises, sterling could be dented considerably further, which could see inflation slipping ahead again due to the impact of pricier imports. Already the pound has fallen on the news, back to below $1.13 and the Bank will won’t want this pattern to accelerate further.
Neither side seems inclined to blink first in this face off, with the government more intensely focused on stopping a deeper recession from forming in the months to come. The Bank of England’s forecast that inflation is set to stay at double digits for months to come is unlikely to weaken the Truss administration’s resolve to put growth first.
The energy price freeze has made Threadneedle’s task a little bit easier, as inflation is now not expected to peak at the really scary level of over 20%, but the pressure is still on. Given the shock and awe tactics of other central banks, who appear to be bringing forward planned rate rises for 2023 into the next few months, the Bank of England is also expected to keep pulling tight on the monetary policy rope to try and tug inflation down with forecasts that interest rates may reach anywhere between 3.5% and 4.75%. It’s clear the path ahead is fraught with uncertainty.’’
Adam Zoucha MD EMEA of FloQast, comments:
“Rising interest rates will put the pinch on accounting teams.
“As the costs of debt and loan repayments tick upwards, greater scrutiny on cash conversion cycle and spending will force teams to review their balance sheet valuations and financial estimates adding to the burden for teams striving to deliver fiscal accuracy.
“With year-end on the horizon, accountants need to anticipate the extra workload and plan accordingly.”
Oliver Chapman, CEO of the OCI comments.
“The Bank of England will have surprised markets today by only increasing interest rates by 0.5 percentage points, whereas the consensus had expected rates to be increased by 0.75 percentage points.
“UK interest rates are now 2.25 per cent compared to US rates of between 3.0 and 3.5 per cent.
“The growing divide between US and UK rates is one of the reasons the pound is currently so weak against the dollar. Today’s decision is likely to exacerbate this weakness.
“With commodity prices valued in dollars, the weak pound has helped drive UK inflation and probably provides the main reason why US inflation (8.3 per cent, with modest month inflation month, rises over the last two months) is lower than the UK’s CPI rate of inflation (9.9 per cent.)
“For UK exporters, a weak pound can be helpful, but right now, inflation is a bigger concern in the UK than exports, and further falls in the pound will put upward cost pressure on the supply chain for UK companies feeding through to inflation.”
