The Bank of England’s Monetary Policy Committee (MPC) voted 7 to 2 to increase its benchmark rate by 50 basis points to 4.0%. The bank said that two members preferred to hold rates steady for now.
The issues remain the same; stubborn inflation and geopolitical strife. That being said, the Bank said that inflation may have peaked in the UK helped by falling energy prices.
Currently, the expectation is for a “market-implied path” that sees rates rising to around 4½% in mid-2023 and then falling back to just over 3¼% in three years’ time.
CI received several comments from financial firms addressing the decision. Jatin Ondhia, CEO of Shojin, said that after ten consecutive rate hikes, there is a “worrying sense of déjà vue.” Ondhia described the Bank’s approach as “heavy-handed” with no signs of abating, causing problems for the economy in the near term.
“As investors continue to navigate testing market conditions, the reduction of real returns through higher inflation represents a significant threat to both fixed income investments as well as equities. Against these headwinds, investors must keep a cool head and consider the tools at their disposal to make their money work harder,” said Ondhia. “I would expect the diversification of investment portfolios to remain a prominent trend in 2023, as inflation remains in double figures but rates rise. It is also likely that tax-efficient investments will gain increasing traction in the months ahead, with investors trying to manage returns in the most effective ways possible.”
Giles Coghlan, Chief Market Analyst at HYCM, predicted this may be the last of the rate hikes pointing to the less hawkish tone of the announcement. While inflation needs to decline, stagflation is a key concern.
“… fears of stunting economic growth remain front and centre, while policymakers also have their reservations over persistent strong wage growth, which could keep CPI above the central bank’s 2pc target for some time yet. The big question facing policymakers has been what problem should the Bank of England focus most clearly on? Today the BoE have decided to slow down on hikes in order to try and stimulate growth. Growth forecasts were revised slightly higher for 2023 and 2024, but both are still in negative territory. Given that the IMF has predicted that the UK is set to be the only G7 economy in a recession this year, this revision higher is at least a ray of hope.”
Coghlan said that on balance, the decision is good for the UK economy.
The Chief Investment Officer of Channel Capital, Paul Wilson, said:
“A decade of record-low interest rates was not economically healthy or sustainable. But moving from all-time lows to a 15-year high of 4% in the space of 14 months has inevitably created challenges for lenders and borrowers alike. For lenders, it has hindered their efforts to secure senior debt from banks and institutions, many of which are reticent to deploy capital in the current climate of changing rates. The shortage in senior debt – which is essential, given it makes up the majority of a lenders’ funding stack – is, in turn, preventing or limiting lenders from issuing loans to clients. It becomes a vicious circle.”
Wilson said it is at times like this that other sources of capital become more important, advocating the role of mezzanine finance.
Douglas Grant, Group CEO of Manx Financial Group, said indications that inflation may be declining provides hope for the beleaguered economy and fears of a recession. He added that the IMF report that painted a gloomy picture for the UK did not help.
“While many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, it is now too late for other businesses which were not so forward thinking. We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis. Our research revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it. What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance. SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. The level of growth that is being prevented is significant and will require novel solutions which are designed to bridge this funding gap.”
Grant called for a “sector-focused permanent government-backed loan scheme” to guarantee the future of SMEs.
It has been a busy week for central banks as the US Federal Reserve and the European Central Bank each increased rates indicating more rate increases will follow until inflation is defeated.