Bank of England Raises Interest Rates – Reactions From Wealth Managers
Chief Economists give their take on the Bank of England’s first consecutive interest rate hike since 2004 and the beginning of the end of its pandemic bond buying programme, as the bank warned that the inflation would peak at 7.25% in April.
Members of the Bank of England’s monetary policy committee raised interest rates from 0.25% today to 0.5%, and economists expect further hikes following sharp consumer price inflation data. In continental Europe, the European Central Bank kept rates unchanged. As the US Federal Reserve plans to hike rates, policy measures diverge.
The interest rate environment has been extraordinary for years, with official rates low or even negative (Switzerland). Such policies have pushed investors who want to protect their capital up the risk curve. Asset allocation models have been thrown out the window.
We carry a series of wealth manager commentaries on the changing landscape of central banks.
James Smith, Economist, ING Developed Markets
“Anything the Fed can do, the Bank of England can do better.”
This is the main takeaway from the BoE’s February meeting. Not only did policymakers raise rates to 0.5%, triggering the process of balance sheet reduction, but four of the nine MPC members voted for a 50 basis point larger rate hike at that meeting.
It is clear that the Bank considers it necessary to act in a preventive manner and to equip itself with a solid cover against the risk of entrenchment of the current high inflation rates. Today’s rate hike will be followed by others at the March and May meetings. Importantly, we do not believe that the initial stages of the bank’s quantitative tightening program, which by ending reinvestments will result in a modest £25 billion reduction in the balance sheet, will prevent the bank from implement further short-term rate hikes.
Paul Dales, UK Chief Economist, Capital Economics
CPI inflation will rise from 5.4% in December to a peak of 7.5% in April and will only be slightly lower in 2023. This will not alleviate the bank’s concerns that high inflation is fueling price and wage decisions. Overall, the bank is stepping up its fight to defend its inflation target. This battle will last through 2022 with interest rates hitting 1.25% instead of the 0.75% most economists were expecting. And victory could require rates over 1.25% in 2023.
Daniele Antonucci, Chief Economist and Macro Strategist, Quintet Private Bank
We expect further rate hikes this year, but we see downside risks to growth in the form of COVID-19, input shortages, tighter monetary and fiscal policies, which squeeze all budgets households, which should ultimately help dampen inflationary pressures and slow the pace of rate normalization fourth across the board.
Georgina Taylor, Multi-Asset Fund Manager, Invesco
The risk is that central banks will be forced to react here and now, rather than charting a policy course incorporating forward-looking measures of growth and inflation. This dilemma was made clear by the Bank of England today thanks to the hawkish decision by some MPC members, alongside forecasts that reveal they expect inflation to fall below target in three years. The implication of this policy maneuver is that they may have to stop climbing very quickly or risk a policy error by dragging the economy down too quickly and too quickly.
Alex Batten, Bond Portfolio Manager, Columbia Threadneedle Investments
Forecasts of inflation well below target and oversupply three years out are a strong signal that the Bank of England believes that more than enough tightening has been priced in. The decision to unwind corporate bond purchases by the end of 2023 and the start of passive unwinding of gilts will bear some of the weight of the tightening policy. We believe that today’s actions increase opportunities for investors entering the gilt market.
Dan Boardman-Weston, Chief Investment Officer, BRI Wealth Management
The ECB left interest rates unchanged at 0%. The move is at odds with the Federal Reserve and Bank of England, both of which are taking a more hawkish stance and are already on course for an unraveling of pandemic-era monetary policy. The Eurozone is experiencing high levels of inflation, but not as high as America or the UK, and the ECB will want to see further evidence of sustained inflation before acting. It is important to note that the Eurozone has consistently had a problem with low inflation over the past decade and so there may be some willingness to let current inflation overtake and let the economy run at full capacity. diet a little longer.
Paul Craig, Portfolio Manager, Quilter Investors
While the Bank of England decided to act today, the European Central Bank has just shown that it is lagging behind when it comes to responding to the sharp rise in inflation. Failing to recognize inflation now risks taking greater action later, which could stall the recovery. The time will come when the ECB will have no choice but to raise its rates. It will come too late, but even in the meantime, volatility is likely to persist in financial markets. This is where bond investors risk getting burned. As in the past decade, global rates will be tied more to the ECB than the Federal Reserve, given its size and size relative to others. With inflation threatening to go higher and higher, rates will have no choice but to join in. Bank of Japan aside, this is the last hammer to fall and will be key to watch.
(photo: Andrew Bailey, Governor of the Bank of England)