Bank of England’s new rate reality

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 23 March 2023. Past performance is never a guarantee of future performance.

Mission: to tame inflation and to stabilise markets. Those were the two mammoth tasks facing the Bank of England (BoE) ahead of its latest Monetary Policy Committee (MPC) meeting today.  

The result was a decision to increase the base rate by 25 basis points (bp) to 4.25%. It came hot-on-the-heels of the US Federal Reserve’s own decision to hike by the same amount the day before, in addition to the European Central Bank’s earlier 50bp hike. The trilogy of hikes confirms the scale of the challenges which persist on both sides of the Atlantic.  

Given we’re only three months into the year, policymakers will be wondering what the rest of 2023 has in store. 

Between a rock and a hard place

Today’s rate news had an air of inevitability about it, even if MPC voting members weren’t unanimous in their verdict. The last time that happened was in September 2021, but on this occasion seven members agreed, while two members were contrarians. As with last month, members Swati Dhingra and Silvana Tenreyro preferred a lower rate than the one that was passed. 

The brutal aftermath of the collapse of tech client-focused Silicon Valley Bank (SVB) in the US, which spooked investors and arguably ended Credit Suisse, left very little room for manoeuvre. A larger hike would have added stress to the banking sector, while a rate cut would have hindered the energy-sapping battle to cool price pressures.  

According to the Office for National Statistics, consumer price inflation rose to 10.4%¹ in February, which is 0.3% higher than the month before. UK price pressures are proving to be more stubborn than many expected.   

Against this backdrop, the BoE is acutely aware that now is the time for extreme caution. While the banking sector remains broadly resilient, thanks to measures taken in the aftermath of the 2008 global financial crisis, central bank decision-making needs more precision than ever if they are to avoid adding unnecessary strain.  

A sign of the times

As we said in last week’s article, Interpreting current market volatility, recent turmoil is a sign of how quickly markets and moods can turn. The rapid increase in the BoE base rate in the last 12 months is further evidence of the pace of change – this time last year, the rate stood at only 0.75%. Fast forward to today, and the rate is the highest it’s been since November 2008.

The BoE’s post-meeting statement made it clear that it was prepared to raise further: “The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. Uncertainties around the financial and economic outlook have risen…. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.²”

For now, their latest hike will have been supported by Chancellor Jeremy Hunt. Only days before, he was quoted as telling a House of Lords affairs committee that recent financial market stress hadn’t changed the government’s core focus. In his words: “The prime minister’s first priority is to halve inflation.” At the same meeting, he described domestic price pressures as being “dangerously high”.³

In conclusion

The BoE already had a tough job on its hands before SVB’s collapse reverberated around the world, making their ‘to do’ list even more complicated. Their decision to scale back the hiking (versus recent raises) demonstrates how precarious the situation is that they, and other central banks, now find themselves in.   

For investors, the case for long-term investing remains robust. As does the case for being diversified. It might sound like a broken record but there’s good reason why the message is repeated time and again. 

Please note: Market Perspectives, our signature monthly investment report, returns on Monday 3 April 2023. 

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