Commentary: Bank of England’s interest rate announcement, June 2023

Commenting on today’s interest rate rise from the Bank of England, William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says:

The Bank of England’s (BoE) rate rise today reflects the fact that inflation now looks to be driven by domestic price pressures – largely stemming from the constricted labour market. Latest data shows salaries (excluding bonuses) rose by 7.2% across the economy, a level inconsistent with the BoE achieving its 2% inflation target. From yesterday’s inflation data, the BoE will also be concerned by the fact that core inflation (which excludes volatile items like food and energy) continued to rise, reaching a 30-year high of 7.1%. In contrast to the price shocks experienced last year which came from external sources, all the above adds to the evidence that the UK is entering a wage-price spiral.

When compared to other economies, the UK is starting to look like an outlier, as inflation is decreasing at a faster rate in the US and euro-zone countries. Consequently, expectations of interest rates surpassing those of the Federal Reserve have increased. As a result, yields on UK government bonds have risen accordingly – UK gilt yields are now almost 0.7% higher than equivalent US Treasury bonds. However, sterling has also been strengthening over the last month as the prospect of higher interest rates and bond yields attracts international investors. Although the market’s expectations of interest rates reaching 6% might be overdone, unless the data improves significantly, it looks likely that there will be additional rate hikes in the coming months. With the level of returns available on holding cash rising, advisers may start to get questions from clients on whether now is the best time to invest. But for advisers, maintaining a long-term view is king, as history shows cash generally underperforms other asset classes over the long run.