The Bank of England today announced the first interest rate rise in a decade, with the base rate up a quarter of a percentage point, from 0.25% to 0.5%.
As reported, the move had been widely expected and comes after last year’s cut from 0.5% following the Brexit referendum.
There was strong support for the move within the Bank, with the nine-person Monetary Policy Committee supporting it by a majority of seven to two.
Reaction has ranged from dismissing it as “largely symbolic” to calling it “an odd decision”. Here is the International Investment round-up of views and commentary from some leading financial industry professionals…
Reaction from the industry
“UK interest rates are still exceptionally low by historic standards.
“The risk is that this is interpreted as the start of a cycle of rate hikes, which could knock consumer confidence at a particularly vulnerable time for the economy.
“Inflation has risen sharply, but this is down to temporary factors.
“The fact remains that wages are not increasing much and nor are underlying prices, so further substantial rate rises would not be warranted at this stage.”
Patrick Connolly, certified financial planner, Chase de Vere
“With the cost of borrowing increasing, individuals and businesses are both likely to have less money to spend on goods and services because they are paying more on mortgages and other debt.
“An environment where individuals and businesses have less spare money will be bad for some shares, such as technology and consumer discretionary stocks which include non-essential purchases like leisure and entertainment.
“Interest rate rises are also likely to hit bond proxies, which provide a consistent level of income and have been bought by many investors as an alternative to expensive fixed interest assets
“This would include shares such as utilities and consumer staples like companies providing food, beverages and household items. These companies can perform well in any economic environment, but the value of their dividend stream becomes less attractive in a rising interest rate environment.
“However, there are many companies that can thrive in a rising interest rate environment.
“This is especially the case when you consider that the UK has started to increase interest rates because the economy is looking in reasonable shape. This can provide a positive environment for companies to perform well and make profits.
“Today’s interest rate rise has been heavily signposted and priced in by markets and any further rises are likely to be slow and gradual, so there shouldn’t be any nasty surprises.
“Rising UK interest rates will, in theory, make sterling stronger, which will benefit UK importers and be negative for UK exporters.
“It is incredibly difficult to predict interest rate movements, as we have seen over the past decade, many ‘experts’ have tried and failed.
“We don’t know for sure whether today’s rate rise will prove to be a one-off or if it is the first of many. However, what we can say with some confidence is that any further rate rises are likely to be slow and gradual.
“The best approach for investors is to try not to be too clever. They should hold a balanced and diversified investment portfolio including equities and fixed interest, which can achieve their objectives regardless of what happens to interest rates in the future.
AJ Bell investment director Russ Mould
“However, several reasons it has given for its prior inactivity remain valid, notably poor wage growth and the uncertainty created by Brexit.
“Investors must now consider the implications for the pound, bonds and the stock market.
“A very gradual series of rate increases looks unlikely to rock the boat too much, at least for now, although if the Bank is right and inflation is coming then investors may need to revise their stock-picking strategy, shifting from growth stocks (like technology) and high-yielding names to more cyclical or value names, like real estate plays or oils and miners, as well as index-linked bonds.
“Above-target inflation figures and low unemployment appear to have tipped the balance, while Governor Carney and colleagues have also flagged concerns over galloping growth in consumer debt.
“The vote of 7-2 in favour of the rate rise and the Monetary Policy Committee statement is as carefully couched as ever, noting that any future increases in the headline cost of borrowing would be gradual and limited.
“Note that LIBOR – the interest rate at which banks are prepared to lend to each other – is just 0.75% for 12 months’ time, implying the market expects just one more 0.25% rate rise by this time next year.”
Justin Urquhart Stewart, co-founder and head of corporate development, Seven Investment Management (7IM)
“Today’s rate rise – the first in ten years – is a new economic era for the new millennial generation, many of whom have never experienced a rate rise before and who have had little choice but to embrace debt.
“My message is not to panic – today’s rate rise merely reverses last year’s emergency cut following the referendum vote.
“Let’s also not forget the older generations – the savers who outnumber the borrowers. This rise will be tiny, especially with inflation at 3%, but any little will help.
“The old generation suffer because someone changed the rules and nobody warned them. Saved all their lives to live off the interest, only to find that the returns are paltry – the new rates are still negative rates!
“This is also a klaxon call to mortgage holders that their monthly payments will inevitably be rising at some stage. Plan now to manage future pain.”
Chris Darbyshire, chief investment officer, 7IM
“The Bank of England has raised base rates, but that’s not the full story. The monetary stimulus put in place following the referendum comprised the base rate cut, a reduction in the ‘countercyclical capital buffer’ rate, plus the Term Funding Scheme (scheduled to terminate in February).
“It was the combination of these three actions that produced the formidable boost to bank lending following the referendum, and it was the willingness of consumers to borrow that has powered the economy over the past year.
“With defaults in unsecured lending ticking up, however, the Bank of England has decided to start taking away the punchbowl. While these changes will impact relatively gradually throughout the year, they represent new headwinds.
“The question is whether the strong economic momentum seen outside the UK can carry across the English Channel, or whether the British economy will suffer another year of lacklustre growth.”
Ben Brettell, senior economist, Hargreaves Lansdown
“The Bank of England followed the script today and raised base rate to 0.5%. The move was widely expected, but sterling has still lost almost a cent, as the accompanying minutes guided towards a gradual pace of rate rises from here. The FTSE rose marginally.
“Today’s move is largely symbolic – even though it’s the first rise in more than a decade.
“The rights and wrongs of the decision will be debated ad infinitum, but it a 25-basis-point increase merely reverses last year’s cut – which was arguably unnecessary – and returns rates to where they’ve been for the entire post-crisis period. So not much has changed.
“It’s easy to argue today’s rate hike is just as uneccessary as last August’s cut.
“The spike in inflation is largely driven by a one-off currency movement which will fall out of the figures in due course. Beyond the currency effect there appear to be few underlying inflationary pressures.
“Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages. Productivity growth is sluggish, and technological changes look to be suppressing wages, with the likes of Uber, Amazon and Netflix disrupting traditional industries.
“Furthermore we need to consider demographics. The baby boomers are retiring in their droves. They have already gone through their consumption phase – they have bought their houses, cars and consumer goods.
“The generation behind them is saddled with debt and struggling to get on the housing ladder. All in all I see more deflationary forces than inflationary at present.
“However, in reality today’s hike makes little difference to the real economy. We’re still firmly in the era of ultra-low rates. Savers are still earning next to nothing, and borrowing is still cheap.
“While two further rises are on the cards next year I expect the Bank to proceed with caution. The UK is lagging behind developed world counterparts in terms of growth, with Brexit-related uncertainty still casting an ominous shadow.”
Anna Stupnytska, global economist, Fidelity International
“The Bank of England (BoE) voted 7-2 to hike rates by 25bps, back to 0.5%. This was widely expected, and reverses the ‘emergency’ cut following last year’s Brexit referendum vote. It is fair to characterise today’s decision as a dovish hike.
“The statement dropped its sentence that rates may need to rise more than the market expects. This is dovish, given that the market expects only two hikes in the next three years, and the bank sees this as sufficient to return inflation back to the 2% target.
“It suggests an incredibly slow hiking cycle at best, with a likelihood of even less if the “considerable risks” that they see from Brexit materialise. Indeed, in the run up to the meeting, several Bank of England members were already striking a more cautious tone.
“Our view is that this hike was an odd decision. The BoE had painted itself into a corner by talking up the possibility of a November hike, having gone back on its word too often in recent years.
“It may have been intended to put a floor under sterling and fire a ‘warning shot’ against some pockets of excessive credit build-up. It may have been a way of placating the more hawkish elements on the board, knowing that one hike alone is unlikely to have a material impact on the economic outlook.
“However, with the UK already slowing and Brexit likely to have a significantly detrimental impact on domestic demand, it is hard to see the BoE hiking again for a long time.”
James Carrick, global economist at Legal & General Investment Management
“However, with two dissenters and the Monetary Policy Committee removing the line about ‘hiking more than markets expect’, the Bank of England remains happy to be ‘limited and gradual’.”
Craig Veysey, manager of the Sanlam Strategic Bond Fund
“While some Bank of England MPC members – even among the most dovish – have been talking up more than one hike, we do not think the committee will be in a rush. The authorities will likely want to see the impact on consumers and households with variable rate mortgages.
“We would expect a pause until this coming May, at the earliest. The BoE will tread a similar path as the Fed the first time it hiked. While the Fed initially indicated it wanted to do more, it was cautious and only raised rates again one year later.
“We do not believe the most dovish members of the MPC have fully embraced more rate hikes just yet; particularly as the UK still faces serious concerns, such as Brexit. Nevertheless, these uncertainties will likely result in more bond and currency market volatility – which will create opportunities for investors.
“As for gilts, the concerns about the UK economy will likely cap yields. It is worth remembering that we have become accustomed to low rates. If sterling rises on the expectation of rate increases, it will dampen inflation and mean there is less of a need to continue hiking rates.