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The Bank of England hikes interest rates

The Bank of England hikes rates exactly as expected, with some soft messaging around the edges. There is no impact on our investment strategy from this carefully managed announcement, but it is another reminder that the era of ultra-loose monetary policy is ending.

Ben Seager-Scott Ben Seager-Scott
02 November 2017

Despite the historic nature of today’s Bank of England (BoE) announcement (it is the first rate hike in a decade), with expectations carefully managed there was little to get too excited about on the day.

The Bank of England’s announcement at a glance

The BoE’s Monetary Policy Committee (MPC) increased interest rates by 25 basis points to 0.5%, just as had been expected by the markets. The result was a muted market response, with the big movements having already taken place back in September when the BoE signalled concern that market expectations for interest rates were too low, and primed the market for an increase (see chart below).

Following the now well-trodden path set by the US Federal Reserve and the European Central Bank, the BoE was careful with its messaging to deliver another dovish hike. With a vote of 7-2 in favour, this was slightly more hawkish than consensus (three dissenters were expected), but against this there was some concern that the two dissenters, Sir Jon Cunliffe and Sir David Ramsden, are considered two of the most senior and experienced committee members. The statement also saw the removal of the reference to more hikes being needed.

The initial market response was for sterling to fall and gilts to rally, reflecting some of the dovish messaging, but the magnitude on this has been only slight.

Our view

As we’ve come to expect with these carefully managed events, there were no surprises in the announcement. The BoE seems comfortable with market forecasts for two more hikes over the forecast period. As we look at the details on our screens, forecasts suggest no more hikes for the next 12 months, with both hikes coming in 2019. There was little change in the forecasts for inflation and GDP growth, with the MPC expecting inflation to fall back towards target over the next couple of years.

Although higher interest rates will tend to have a negative impact on consumers, this marginal move and the very gradual path means the direct impact should be limited. However, we believe UK economic growth will face headwinds whilst real wage growth remains negative, a factor that the Bank Governor, Mark Carney, also highlighted in his press conference.

Overall, today’s announcement has no impact on our investment strategy, and despite recent moves in government bond yields, the asset class remains unattractive. What is clear is that the era of globally co-ordinated, ultra-loose monetary policy is over and earnings, rather than liquidity, will need to drive markets from here.

Important information

This document is solely for information purposes and is not intended to be, and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.  The opinions expressed are made in good faith, but are subject to change without notice.