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Investment Managers React To Bank Of England Rate Rise

Amanda Cheesley, Deputy Editor, London, 5 August 2022

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After the Bank of England raised rates by 0.5 per cent at their August monetary policy meeting, taking the official rate to 1.75 per cent, investment managers react on the impact for the UK economy and investors.

In response to the rise in inflation that the Bank of England said would reach 13.3 per cent by October, this week the central bank increased the base rate by 0.5 per cent and warned of a prolonged recession in the UK.

The move was in line with market expectations and marks the sixth rate increase in as many meetings, making it the largest rate rise seen from the central bank since June 1995. Officials voted eight to one in favour of the increase, with the single dissenter opting for a 0.25 per cent hike.

The central bank said that the UK would move into recession in the last quarter of 2022, and emerge from it before the next election in 2024.

The rise in the energy price cap is thought to be the main reason for the rise in inflation to 13 per cent, as well as the continuing supply chain disruption affecting global trade.

Here are some reactions from investment managers on what the rise will mean for investors and the economy.

Brian Nick, chief strategist at investment manager Nuveen
“It’s hard to recall a bleaker outcome to a central bank meeting than we got from the Bank of England this morning [yesterday]. The fact that they are forecasting a rise in inflation to 13.3 per cent around the same time the economy enters a prolonged recession is just bad news all around.”

“It’s clear that the MPC is opting to try to “crush” inflation – to the extent a central bank can help push down energy prices – by hiking interest rates quickly, even if it comes at the expense of economic growth. The desire is to bring down inflation faster than they bring down growth and income, helping real incomes turn around from their steep decline in recent months.”

“I saw some rumblings about the new government wanting to take a look at the inflation mandate and perhaps restrict the independence of the central bank. History suggests that would be a mistake. This is an extremely challenging time for central banks, partly due to their own errors in 2021 but primarily due to circumstances beyond their control. There are no good options, really, and trying to bring inflation down from double digits seems to be the more pressing task at hand.”

David Goebel, associate director of investment strategy at wealth manager Evelyn Partners
“Although the 9.4 per cent June inflation print was driven by external factors, mainly global energy prices, this rate move signals the bank is also concerned with domestic sources of inflation like wage growth. Continuing weakness in sterling, which has depreciated by around 10 per cent year-to-date relative to the US dollar, increases the risk of further inflationary pressure.”

“However, policymakers are balancing this with concerns over weakness in the economy – demand in the UK labour market is easing, and energy prices are set to rise by as much as 70 per cent in the autumn, when Ofgem’s next price cap comes into play. Softening consumer confidence points to weaker spending in the second half of this year, so declining growth could go some way to curtailing high levels of inflation in itself.”

“There is also a political angle to consider. Liz Truss, who bookmakers currently suggest has over a 90 per cent chance of becoming the next prime minister, is vowing to cut taxes, which could stoke inflation further. She has also suggested she would look at changing the mandate of the Bank to make it more effective in fighting future inflation, but without detail on how as yet.”

“For investors in UK equities, the fortunes of the UK economy are less important than its sectoral composition. That’s because around two-thirds of its earnings are derived from overseas, while increasing rates tend to favour the value orientated sectors which the UK market has relatively high exposure to.”

“The biggest impact on UK investors will likely be through exchange rates, where weakness in GBP this year has been to their benefit. With continued expectations for interest rate increases from most central banks, it is difficult to see a markedly stronger pound in the near term.”

Shane O’Neill, head of interest rates, Validus Risk Management: 
“The caveat to this is that the BoE have become significantly more pessimistic about the state of the economy, predicting a recession that starts in Q4 this year and lasts through 2023. Not just a technical recession but a drop in output of 2.1, the worst performance for the economy since the global financial crash, should it come to pass. Not done with shocks, the bank also predicts a peak inflation print of over 13 per cent and to remain elevated through much of 2023 – meaning the cost-of-living squeeze isn’t going away any time soon.”

“Unsurprisingly, the market has latched onto the worsening forecasts more than the expected 50 bps hike and we have seen the pound fall more than 0.5 per cent against the dollar and the euro immediately following the release. Longer dated gilt yields have also fallen following the release with the 2s10s curve inverting for the first time since 2019. The dreary predictions from the MPC represent ongoing pain for the consumer and focus will quickly turn to politicians to act – with Liz Truss the heavy favourite to take the Tory leadership, she may find the position a poisoned chalice as she takes the wheel just as we enter the worst recession in over a decade.”

Schroders, a global investment manager     
Schroders believes that inflation could remain a problem for longer than expected. "Where we differ from the central bank in its assessment is that we do not believe that inflation will fall back by anywhere near as much as the BoE is forecasting. We see greater domestic inflationary pressures building, which will require even higher interest rates. This is likely to stop the central bank cutting interest rates in 2023/24, as suggested by its forecast, but instead continue to maintain above neutral rates for longer, with the hope that inflation returns to target over a longer period of time," Schroders said in a statement.

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