Investors shrug off BoE Governor’s suggestion of early rate hike


Interest rates ‘very unlikely to go up this year’: Investors say it would need a big inflation shock for the Bank of England to hit the economy with higher borrowing costs

  • Andrew Bailey said the BoE could move to hike rates sooner than expected
  • But investors believe this is unlikely and the hike will take place in February 
  • Markets are currently pricing interest rates to rise to 0.5% by November 2022 


The Bank of England will not raise interest rates before the end of this year, according to investment experts, despite the hawkish tone taken by Governor Andrew Bailey.

Bailey raised the prospect of an early interest rate hike in a speech to the Society of Professional Economists in London, saying the monetary policy committee is ready to do what is necessary to tackle rising inflation.

He said the MPC is ‘of the view that the stimulus to monetary policy enacted in response to Covid would need to start to unwind at some point [and] that unwind should be enacted by an increase in bank rate’.

Such an increase would not need to wait until the end of the current asset purchase (or quantitative easing) programme in December. There are two opportunities remaining this year for the MPC to move on rates, on 4 November and 16 December.

Governor of the BoE Andrew Bailey said the MPC are ready to act before Christmas if necessary 

Financial markets are not expecting action at either meeting. They are pricing a 15 basis-point rise in interest rates in February 2022 and another in November, which would take the rate to 0.5 per cent.

While the BoE still considers the current uptick in inflation to be ‘transitory’, with expectations it could exceed 4 per cent by year-end, higher-than-than expected price rises may mean a more urgent response is needed.

Bailey also noted that the UK’s economic recovery ‘has slowed and the economy has been buffeted by additional shocks’. The MPC recently revised down its forecast for Q3 GDP growth to 2.1 per cent from 2.9 per cent.

CPI inflation jumped beyond expectations to 3.2% in August

CPI inflation jumped beyond expectations to 3.2% in August

Michael Hewson of CMC Markets UK said Bailey’s remarks show the ‘tide appears to be turning’ at the BoE, with the MPC ‘ready to raise rates before Christmas if needed to prevent higher inflation becoming more persistent’.

He added: ‘It would appear that some on the MPC are starting to get nervous about a possible surge in wage inflation.’

However, the market reaction was muted in response to Bailey’s remarks, with investors more concerned by developments at the US Federal Reserve overnight. The UK 10-year gilt yield edged 0.04 percentage points to 1 per cent alongside a wider sell-off in government bonds. 

Chief investment officer at YOU Asset Management Shane Balkham said a 2021 rate hike is unlikely, and the UK would ‘need to see a significant increase in the inflation numbers’ for that to happen.

He added: ‘Andrew Bailey was doing what all good policymakers do; making clear that everything was on the table in terms of tools they can use.

‘To have said “there is no chance of rates rising until 2022” would have sent a negative message to the markets, in a similar way Mark Carney wobbled when looking to start raising rates after the Global Financial Crisis.’

Chief investment officer of Ravenscroft Kevin Boscher agreed it was ‘very unlikely’ that the BoE will raise interest rates this year, with the MPC waiting until November ‘at the earliest’ to get a clearer outlook for the UK economy post-furlough and after the October Budget.

How investors can prepare portfolios for higher rates

Ben Kumar, senior investment strategist at 7IM, says:

‘While we don’t expect movement tomorrow this does not mean that investors shouldn’t be preparing for rate rises and looking for opportunities that are designed to do well in a rising-rate environment – even if this is a question of years, not months. 

‘For example, we are currently positioned for this by being underweight government bonds, overweight alternatives, overweight value and underweight tech.

“In fixed income, we think investors should also allocate to higher yielding parts of the universe, and towards alternatives, where possible. 

‘As interest rates begin to grind upwards again – as we believe they will – investing in the kinds of bonds which have a little more protection in the form of higher coupon payments, will be beneficial. 

‘Government bonds will still protect portfolios, but aren’t going to make much in the way of returns.”

 

He said: ‘The number of people furloughed at the end of July exceeded [the MPC’s] expectations. It also made it clear that it still views the recent increase in inflation as transitory and that it believes that the recent rise in households’ inflation expectations are consistent with them remaining anchored.

‘It is clear from a wide range of economic data that the global economy is slowing, especially in China and the US. Although inflation in the UK and US will remain elevated for some time, mainly due to the ongoing post pandemic supply/demand disruption, I believe it is peaking and will fall back over the next six-to-12 months in line with central bank forecasts.’

For investment manager at Aegon Asset Management James Lynch, the UK’s labour market is the key factor to consider in predicting the BoE’s course of action.

‘If the labour market looks robust post end of furlough scheme with wages increasing, the BoE are more likely to think this will translate into sustainable inflation (while inflation expectations are currently high),’ he explained.

‘This could force a move earlier and/or a move to higher rates than the market is pricing.

‘[The BoE is] still… on the more cautious side of waiting for more incoming data from the labour market which would make February more likely than November. However if the data is clear enough then I could not rule out an earlier move higher.’



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