The Bank of England raised interest rates by 0.5 per cent today at its monetary policy meeting.
This marks the Bank’s tenth straight hike to the base rate, which now stands at 4 per cent, its highest level since 2008.
Policymakers continue to have differing opinions on the appropriate course for rates, though not as much as the three-way divide witnessed in December, as evidenced by the Monetary Policy Committee’s (MPC) 7-2 vote in favour of 50 bps – 0 bps, respectively.
Standard Life, part of Phoenix Group senior business development manager Kieran Mistry says: “With the latest rate rise from the Bank of England largely anticipated, we expect this increase will already have been priced into schemes’ plans and shouldn’t significantly impact the much-improved funding position many have found themselves in.
“For Trustees of those fortunate schemes, the focus will be on capitalising on improved funding levels, setting this year up to be a record for the pension risk transfer market, with volumes predicted to top £40bn. Even before adjusting for interest rates, this could make volumes of buy-ins and buy-outs in 2023 the highest annual total to date. Many Trustees will be turning their attention to scheme preparation and reviewing asset strategies for buy-out readiness as priorities ahead of derisking activity.”
Aviva Investors senior portfolio manager Steve Ryder says: “With an all but certain 50bp hike delivered by the ECB today, the market’s focus was on the statement and press conference to understand the future path of rates. Today the ECB signalled a strong commitment to hike by 50bps again at the March meeting, but from there adopt a more data dependent approach.
“After the Fed and BoE both hinted at being close to the peak in their cycles, today’s meeting suggests the ECB are comfortable that they are also close to the end of their monetary tightening. We believe this peak tightening backdrop will continue to reduce volatility in government bonds over the coming months and make for an attractive income opportunity.”
Evelyn Partners investment strategist David Goebel says: “The Bank also published its quarterly outlook on the economy which revealed an upgrade to growth expectations. Gas and electricity prices have roughly halved compared to their November forecasts. Better than expected data in terms of GDP (0.1 per cent for November, relative to expectations of -0.2 per cent), and strong wage growth led the Bank to improve its growth expectations for 2023 to -0.5 per cent from their previous estimate of -1.5 per cent in November.
“This upgrade has led to a significant reduction in the forecast depth and length of recession facing the UK, with the economy now set to contract by almost 1 per cent over five quarters, rather than 2.9 per cent over eight quarters.
“However, in terms of inflation, there are several signs pointing to its continued persistence, which will have encouraged MPC members to make the 50bps move today. Headline inflation fell for the second month in December to a level of 10.5 per cent YoY which was in line with market expectations, but the core measure (excluding food and energy) proved slightly stickier than expected at 6.3 per cent. There is still tightness in the labour market, with survey measures of recruitment indicating continued difficulty in hiring.
“Wage growth running at 7.2 per cent in the 3 months to November remains far above a level consistent with the Bank’s 2 per cent CPI inflation target. In today’s statement, the Bank said, “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”, omitting the word ‘forcefully’ from a similar sentence in the previous statement.
“Prior to the meeting, expectations for future increases in rates were modest – perhaps another cumulative 50bps before peaking at the June or August meetings. This represents a considerable downgrade on what markets expected in November, which was for rates to reach around 5.25 per cent, and caused Governor Andrew Bailey to suggest they were too high. Market expectations now seem fairly in-line with the Bank.”
