- Andrew Bailey says BoE may hike rates sooner than expected
- But investors believe it is less likely and that the hike will happen in February.
- Markets are currently pricing in raising interest rates to 0.5% by November 2022
According to investment experts, the Bank of England will not raise interest rates before the end of this year, despite a sharp tone taken by Governor Andrew Bailey.
Bailey, in a speech to the Society of Professional Economists in London last night, raised the prospect of an early interest rate hike and said the Monetary Policy Committee is ready to do whatever is necessary to tackle rising inflation.
He said the MPC is of the view that monetary policy stimulus implemented in response to COVID will need to be introduced at some point. [and] That the unwinding should be enacted by increasing the bank rate’.
Such growth would not need to wait until the end of the current asset purchase (or quantitative easing) program in December. There are two opportunities left for MPC to move forward on rates on November 4 and December 16 this year.
BoE Governor Andrew Bailey said the MPC is ready to act before Christmas if necessary
Financial markets are not expecting action in any meeting. They are stipulating a 15 basis-point increase in interest rates in February 2022 and another in November, which will take the rate to 0.5 percent.
The bank still considers the current rise in inflation to be ‘temporary’ even though it expects the rate to exceed 4 per cent by the end of the year – double the MPC’s target.
However, an inflationary shock – which is a growing possibility as energy and food prices are forced by supply constraints – could force the MPC to react more urgently.
Michael Hewson of CMC Markets UK said Bailey’s remarks suggest that ‘the tide is turning’ at the BoE, with the MPC ‘ready to raise rates before Christmas to prevent high inflation from becoming more persistent’.
He added: ‘It appears that some people in the MPC are getting nervous about a possible jump in wage inflation.’
Bailey balanced his enthusiasm with the observation that the UK’s economic recovery has ‘slowed down and the economy has been hit by additional shocks’. The MPC recently lowered its forecast for third quarter GDP growth from 2.9 percent to 2.1 percent.
Referring to the growing pile of UK economic concerns, the BoE jokingly asked ‘when is the locust plague going to arrive tomorrow’.
CPI inflation rises above expectations to 3.2% in August
Market reaction was muted, with traders more concerned over developments in the US Federal Reserve overnight. The UK 10-year gilt yield rose 0.04 percentage points to 1 per cent, coupled with a broad sell-off in government bonds.
Shane Balkum, chief investment officer at U Asset Management, said a 2021 rate hike is unlikely, and for that to happen the UK would ‘need to see a significant increase in inflation numbers’.
He continued: ‘Andrew Bailey was doing what all good policymakers do; Making it clear that everything was on the table in terms of the equipment they could use.
‘To say that “there is no chance of a rate hike until 2022” would have sent a negative message to the markets, in the same way that Mark Carney faltered to start raising rates in the aftermath of the global financial crisis.’
How Investors Can Prepare a Portfolio for Higher Rates
Ben Kumar, Senior Investment Strategist, 7IM says:
‘While we do not expect movement tomorrow, this does not mean that investors should not prepare for rate hikes and seek opportunities that are designed to perform well in a rising rate environment’ – Even if it is a question of years, not months.
“For example, we are currently positioned for this due to underweight government bonds, overweight options, overweight value and underweight technology.
“In fixed income, we think investors should also allocate to the higher-yield parts of the universe and, where possible, to options.
“As we believe that interest rates start to move upward again – it would be beneficial to invest in some of the higher security bond types in the form of higher coupon payments.”
‘Government bonds will still protect the portfolio, but aren’t going to do much in the way of returns.
Ravenscroft Chief Investment Officer Kevin Bosher agreed it was ‘very unlikely’ the BoE would raise interest rates this year, with the MPC waiting until November ‘at the earliest’ to get a clear outlook for the UK economy Can go October budget.
He said: ‘The number of holidaymakers at the end of July exceeded [the MPC’s] Expectations. It also clarified that it still views the recent rise in inflation as tentative and believes that the recent increase in inflation expectations of households is consistent with them remaining stable.
‘It is clear from a wide range of economic data that the global economy is slowing, especially in China and the US. While inflation in the UK and US will remain high for some time, mainly due to the ongoing supply/demand disruptions following the pandemic, I believe it is peaking and is expected to peak in the next six to 12 months. Will return as per the bank’s forecasts. .’
For James Lynch, investment manager at Aegon Asset Management, the UK labor market is a key factor in predicting the BoE’s action.
“If the labor market looks strong with wage increases, the BoE expects this to translate into sustainable inflation (while inflation expectations are currently high),” he explained.
‘This may force a move earlier and/or price a move at higher rates than the market.
‘[The BoE is] Still… on the more cautious side of waiting for more incoming data…