Industry reacts on BoE's decision to hike rates

Ridhima Sharma
Industry reacts on BoE's decision to hike rates

The Bank of England has raised interest rates from 0.5% to 0.75%, the highest level since the financial crisis almost a decade ago, with the financial sector warning that it is taking a gamble as the outcome of Brexit remains unclear. InvestmentEurope gathers comments from the industry.

Timothy Graf, head of macro strategy EMEA at State Street Global Markets:
“Today’s hike and messaging from the MPC was more or less what markets expected heading into this pivotal policy meeting. The BoE continues to deliver rate normalisation, but further hikes will be very much ‘wait-and-see’ propositions. By the time the next quarterly inflation report is released in November, the BOE might have a clearer idea of what Brexit looks like and whether inflation remains above target. Even so, with so many questions around the health and potential of the UK economy, the deliberative tone of the MPC’s messaging is likely to persist. With rates now out of the way as a market talking point for the next few months, focus is likely to return to the ever-changing nature of Brexit. We suspect sterling will likely become even more correlated to headline risk.”

Stewart Robertson, Senior Economist at Aviva Investors:
“As widely expected, the Bank of England raised UK interest rates from 0.5% to 0.75%, only the second rate rise in more than a decade. Moreover, it was a unanimous 9-0 vote. The Bank’s main justification for tightening is that although demand growth is currently quite low (around 1.75% and expected to stay there), it still probably exceeds the assessed growth rate of supply potential (1.5%). With the economy judged to be operating more or less at capacity, including in the labour market, a nudge on the policy brakes was warranted.”

Matthew Russell, fixed income fund manager at M&G:
“The unreliable boyfriend finally turned up with some flowers – after months of going back and forth, the Bank of England delivered what everybody had been expecting for months.

“The tightness of the labour market may have been the main reason behind all MPC members agreeing on the hike today – perhaps this tightening of the labour market is a bit beyond their comfort levels.

“This hike shouldn’t raise any eyebrows. Unemployment is at its lowest since 1975, unit labour costs are on the rise, PMIs are looking healthy and inflation is above target. Hence why increasing the rate by 25bps does not come as a surprise”.

Gordon Andrews, tax and financial planning expert at Quilter:
“Basic logic would say that when interest rates rise so do savings rates. However, savers shouldn’t be surprised if they don’t see this translate to extra pounds in their savings accounts as banks and buildings societies are likely to keep the benefits of the rise to themselves.

“There may be some smaller building societies that would pass on the rise and so savers should keep an eagle eye on rates in the coming weeks as sometimes good deals don’t last long. This will require a behavioral change as people are tending to stick with their current provider rather than shopping around. The FCA has recently found that only 9% of consumers have switched their cash savings provider in the last three years.

“People who aren’t keeping an eye on how their rate compares to the rest of the market are missing out on potentially thousands of pounds. For instance, say you put £2,500 into a savings account for two years. If you receive the current average rate of 0.42% you’d gain £16. If you shopped around and got the current best rate of 1.4% then you’d gain £56.”

Rob Hodgson, head of Wealth Management at GWM Investment Management:
“The Federal Reserve left interest rates unchanged, remaining on track to deliver a hike in September. Closer to home, financial markets were pricing in the near-certainty of today’s rate rise of 25bp in the U.K. The base rate now stands at 75bp. Banks use the rate as a reference point for the amount they pay savers and charge borrowers, so the move matters to millions of us. That said, after the last rate rise half of savings accounts were unchanged!

“Higher interest rates mean that the BoE believes the UK economy is strong enough to handle a rate rise. It is also trying to control inflation, encourage us to spend a bit less and save more. At 2.4%, inflation is above target but that reflects the effects of the depreciation of the pound following the Brexit referendum. Further hikes will be few and far between because UK economic growth is in a fragile state at the moment.”

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