The Bank of England has delivered yet another raise to the UK base rate with a 25bps move today.
The hike to 5.25% was expected, but has nonetheless proved somewhat controversial. While inflation in the UK economy remains far above target at 7.9%, concern is rising that over-tightening could push the UK into a deep recession.
Notably, two members of the monetary policy committee voted for a larger 0.5% hike, demonstrating the Bank’s determination to clamp down on inflation at all costs.
Andrew Bailey and colleagues are likely to come under close scrutiny as mortgage payers and other borrowers across the country feel the economic pain created by their policy decisions.
Commentators see little prospect of the Bank changing its stance until inflation is much closer to the 2% target rate though.
Charles White Thomson, CEO at Saxo UK, said: “Today’s hike of 25bps by the Bank of England takes the cumulative rate hikes to 515 basis points from the turbo charged days of base rates at 10 basis points. The ‘no ifs, no buts’ war on enemy number one, inflation, is a battle royal and continues to apply significant pressure to the struggling UK economy and consumer.
“We should not underestimate the speed and ferocity of such rate moves and the pressure this is applying to the leveraged consumer. The full extent of this has yet to be seen, as with inflation there is lag, including mortgage holders who are rolling off unprecedented super cheap deals. Monetary policy setters, especially in the UK , have a highly difficult conundrum to solve – defeat inflation with the blunt weapon that are interest rates without breaking the economy and consumer.
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“The risk for further policy failure is real and the stakes are getting increasingly high,” he continued. “The question of how we got here is a critical one. I want institutions like the Monetary Policy Committee to break the cycle of group think. It is not just the Bank of England; it is many of the world’s central banks and other institutions who suffer from this.”
In contrast, James de Bunsen, portfolio manager on the multi-asset team at Janus Henderson, argued the BoE had “no choice but to hike again today”.
“Real signs of pain in the housing market earlier this week all but ruled out another 50bps rise,” he said. “However, the MPC will keep administering its bitter medicine to the economy until it cures those price pressures. And, like a toxic course of chemo, this patient is going to feel a whole lot worse before it starts to get better.”
Laura Suter, head of personal finance at AJ Bell, said: “It might feel like madness to call peak interest rates when the Bank of England has just raised rates for the 14th time, and the market is still pricing in another couple of hikes from the Bank this year. But for consumers this could be peak interest rates, as banks and building societies have started cutting both savings and mortgage rates.
“Slowing inflation means that interest rates aren’t expected to rise by as much as they previously were – a few months ago we were expecting rates to peak at 6.5% but expectations now are 6% or even 5.75%.”
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Marcus Brookes, chief investment officer at Quilter Investors, added: “Having taken more drastic action at its last decision, the Bank of England has today settled for a quarter of a percentage point rise in interest rates to 5.25% – the highest level since April 2008 when the world was gripped in the financial crisis. Even with inflation coming down faster than forecast recently, this may not be the end of the BoE’s action. Yes, the interest rate rises we have seen to date are beginning to have an effect, but it is not certain that it is enough yet to get inflation back to the 2% target the BoE operates to. As such, we may need to expect another rise later this year.
“That said, interest rates probably don’t have to go as high as the market is predicting, currently somewhere above 6%. The UK economy and consumer has been incredibly resilient but are clearly now beginning to be hit. Inflation is falling and should continue to do so for the rest of the year, even if not to that magic 2% number. The next few sets of inflation data will be crucial to see just what impact the BoE has managed to have and what is still likely to come.”
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