Chief economists give their take on the Bank of England's first back-to-back interest rate hike since 2004 and the start of winding down its pandemic bond buying programme, as the bank warned that inflation will peak at 7.25 per cent in April.

The Bank of England’s monetary policy committee members raised interest rates by 0.25 per cent today to 0.5 per cent, and economists expect more hikes to come following strong consumer price inflation data. In continental Europe, the European Central Bank has kept rates on hold. With the US Federal Reserve considering hiking rates, policy moves are diverging.

The interest rate environment has been extraordinary for years, with low or even negative official rates (Switzerland) in place. Such policies have forced investors who want to protect capital up the risk curve. Asset allocation models have been thrown out of the window.

We carry a range of comments from wealth managers about the changing central bank landscape.

James Smith, economist, ING Developed Markets
“Anything the Fed can do, the Bank of England can do better.”
 
That is the central takeaway from the BoE’s February meeting. Not only did policymakers hike rates to 0.5 per cent, kick-starting the process of balance sheet reduction, but four out of a total of nine MPC members voted for a larger, 50 basis-point rate rise at this meeting.
 
It is clear that the Bank sees a need to act pre-emptively and build a strong hedge against the risk of the current high inflation rates becoming embedded. Today's rate rise will be followed by more at both the March and May meetings. Importantly, we do not think the initial phases of the bank’s quantitative tightening programme, which by ending reinvestments will see a modest £25 billion roll-off the balance sheet, will stop the bank from implementing further rate rises in the near term.

Paul Dales, chief UK economist, Capital Economics
CPI inflation will rise from 5.4 per cent in December to a peak of 7.5 per cent this April and will be only marginally lower in 2023. This will not ease the bank’s concerns that high inflation is feeding into price and wage decisions. Overall, the bank is stepping up its fight to defend its inflation target. This battle will last throughout 2022 with interest rates rising to 1.25 per cent rather than the 0.75 per cent that most economists had been expecting. And victory may require rates rising above 1.25 per cent in 2023.

Daniele Antonucci, chief economist and macro strategist, Quintet Private Bank 
Our expectation is for further rate hikes this year, but we do see downside risks to growth in the form of COVID-19, input shortages, tighter monetary and fiscal policy all squeezing household budgets, which should eventually contribute to curb inflationary pressures and slow the pace of rate normalisation fourth down the line.

Georgina Taylor, multi-asset fund manager, Invesco
The risk is that central banks are being forced to respond to the here and now, rather than lay out a policy path incorporating forward looking measures of growth and inflation. This dilemma has been laid out clearly by the Bank of England today through the hawkish move by some members of the MPC, alongside forecasts that reveal they expect inflation to fall to below target in three years’ time. The implication of this policy manoeuvre is that they may have to stop hiking very quickly or risk a policy mistake by putting the brakes on the economy too fast and too quickly.
 
Alex Batten, fixed Income portfolio manager, Columbia Threadneedle Investments
The forecasts for inflation some way below target, and excess supply three years out, are a strong signal that the Bank of England thinks more than enough tightening has been priced in. The decision to unwind corporate bond purchases by end 2023 and the start of the passive unwinding of gilts will take some of the burden of tightening policy. We believe today’s actions increase opportunities for investors at the front end of the gilt market.

Dan Boardman-Weston, chief investment officer, BRI Wealth Management
The ECB has left interest rates unchanged at 0 per cent. The decision is at odds with the Federal Reserve and the Bank of England who are both taking a more hawkish stance and are already on the path of unwinding pandemic-era monetary policy. The eurozone is experiencing high levels of inflation but not as great as America or the UK and the ECB will want to see further evidence of sustained inflation before taking action. It’s 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 overshoot and let the economy run hot for 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 behind the curve when it comes to responding to the sharp rise in inflation. Failing to acknowledge inflation now, risks greater action required later, which could stall the recovery. The time will come where the ECB will have no choice but to raise rates. This will come too late but, even in the meantime, volatility is likely to be persistent in financial markets. This is where fixed income investors risk getting burned. As per the last decade, global rates will be more linked to the ECB than the Federal Reserve, given its scale and magnitude versus others. With inflation threatening to go higher and higher, rates will have no choice but to join it. Aside from the Bank of Japan, this is the last sledgehammer to drop and will be critical to watch.

(pictured: Andrew Bailey, Governor of the Bank of England)