Commentary: Bank of England’s interest rate announcement

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

“This is the 8th consecutive rate hike and it’s the largest since before the Bank of England started targeting inflation in 1992. It is no surprise that the BoE has decided to increase the pace of rate tightening following the chaos of the (now previous) government’s mini-budget. In the days following Kwasi Kwarteng’s statement, markets were pricing in rate hikes of as high as 1.5% by the 3rd November meeting. As the policies from the mini-budget started to be unwound and Rishi Sunak replaced Liz Truss, the markets tempered their expectations of rate hikes, but that said, interest rates are still expected to be slightly higher by next May than was expected before the mini-budget.

“The most recent inflation data release, for the month of September, showed a return to July’s 40-year high of 10.1%. Probably more troubling for the BoE was the increase of Core CPI, a measure that excludes volatile items like food and energy, from 6.3% to 6.5% – also a multi-decade high. With the rate of inflation still unacceptably high, the BoE is expected to continue increasing interest rates until at least next spring. As we have seen over the past month or so, the government’s fiscal policy is now an important consideration for the BoE. The huge amount of uncertainty and U-turns on this has made an already difficult job more challenging. The BoE’s Monetary Policy Committee will hope that the new Prime Minister can bring some clarity and stability to that area.

“The immediate reaction from markets to the interest rate decision has been relatively muted as the market had anticipated the 0.75% hike. That said, longer dated UK government bonds and the pound sold off as the BoE gave a gloomy prediction for the economic outlook. One glimmer of hope is that the BoE hinted that interest rate hikes may not need to go as far as markets were previously anticipating, this has boosted the value of shorter-dated bonds. This contrasted with yesterday’s messaging from the Fed chairman of a higher peak in rates in the US. The feeling from markets now is that the UK could be reaching a peak level of interest rates relatively soon thereby increasing the relative attractiveness of bonds for investors.”