Bank of England raises key interest rate to 0.25%

The Bank of England has raised interest rates from 0.1% to 0.25% in its first increase in more than three years, saying that the risks of inflation required it to take action even as the UK is engulfed by the Omicron wave of coronavirus.

We speak to four of Omnis’ investment managers to get their thoughts.

View from the Omnis investment team

Colin Gellatly, Deputy chief investment officer at Omnis Investments

“The UK economy is facing some headwinds. Despite the tight labour market, wages aren’t keeping pace with inflation. This hit to real incomes is going to be exacerbated by a probable 40% rise in energy prices in April, the increase in National Insurance contributions and the freezing of income tax bands. All of this means that real (inflation-adjusted) take-home pay is likely to fall next year. And to top things off, exports are being hit by Brexit.

Ordinarily, this would make it very difficult for the Bank of England to raise rates all that far. If the Omicron wave is serious, consumer sentiment could be affected and headwinds could strengthen. The ace in the hole is the high level of household savings. Consumers could draw on these to offset the decline in real incomes, helping to support economic growth. Even so, this looks a relatively muted outcome compared to hopes that these savings could fuel a decent period of above-trend growth.

The Bank of England was going to raise rates at some point in the next few months, so this hike hasn’t been completely unexpected. By raising rates now, policymakers are signalling that they are taking inflation seriously. However, we don’t think they’ll be able to raise interest rates very far.”

View from Franklin Templeton

Investment manager of the Omnis UK All Companies Fund and Omnis UK Smaller Companies Fund

“Although the timing of the interest rate hike from the Bank of England’s Monetary Policy Committee was a bit of a surprise, it was widely expected that rates would rise over the next few months. This follows on from a rather hawkish US Federal Reserve. So far, the market has taken the news in its stride as early action is seen as making it less likely that rates will need to go as high later.”

View from Fidelity

Investment manager of the Omnis Strategic Bond Fund

“The market was only implying a one-in-three probability of this hike so clearly it has come as a bit of a surprise to the market, especially after November’s surprise ‘no hike’. The economic data clearly supports the hike and it’s notable that the Bank of England’s statement references the surprising strength of the UK labour market and the upside news in core goods prices. The market had been leaning more on the downside risks from the Omicron variant and associated restrictions on mobility, and we’ve seen some underperformance of gilts (bonds issued by the UK government) compared to Treasuries (bonds issued by the US government) after the meeting.

It’s possible that this could be a warning of a slightly longer period of gilt weakness, as we saw in September. In the medium term we don’t see a huge impact though. The Bank of England is still only talking about “some modest tightening of monetary policy over the forecast period” and we expect UK (and US) inflation to peak in April before falling back. Growth everywhere is slowing with plenty of downside risks and we expect bond markets to continue in the firmly low-yield environment that we’ve become accustomed to.”

View from Columbia Threadneedle

Investment manager of the Omnis UK Gilt Fund and the Omnis UK Corporate Bond Fund

“The Bank of England surprised the market with an eight to one vote to raise the benchmark rate to 0.25%. This is the first hike since August 2018, made on the back of a 5.1% inflation rate in November and well over the 2% target. The committee has forecast that inflation should peak in April at 6%, staying around 5% throughout the winter. The market is already expecting a further rate hike in February 2022.

On inflation, we do not see the current inflationary pressures leading to sustainable pay rises, and expect the combination of negative real wage growth, fiscal headwinds, and tighter monetary policy, at the margin, to weigh on the UK economy going forward.”

View from Axa Investment Managers

Investment manager of the Omnis Short Dated Bond Fund

“Due to persistently high inflation and despite the Omicron variant, there was a clear risk the US Federal Reserve and Bank of England would become more hawkish (hawkish policies tend to focus on controlling inflation as a primary goal) to try to regain control of the inflation narrative. The rise was in line with our forecast, but against market expectations. The case for a hike was clear with inflation rising more than expected and a tight labour market with signs of rising pay pressure and second round inflation effects.

The Bank of England argued that while uncertain, Omicron posed downward risks to activity, but a more uncertain outlook for inflation. Future rate hikes will depend on the evolution of the virus. For now, we continue to expect two hikes in 2022 and one in 2023, but acknowledge that uncertainty around rate hikes remains elevated.”

Richard Rushworth, Mortgage Broker at Thomas Oliver said:

‘This interest rate rise has surprised the market. In November 2021 we released our monthly mortgage offers and reflected that they were the lowest mortgage rates we had offered all year. As rates have now gone up any clients on a variable mortgage will see their monthly payments increase, but mortgage clients who fixed their mortgage recently won’t be affected. If you are considering moving house in the New Year we strongly recommend you take mortgage advice as soon as possible, so you can take advantage of the best mortgage deals available. Our mortgage brokers offer expert mortgage advice for anyone moving home, re-mortgaging or requiring a buy-to-let mortgage. Call the Thomas Oliver mortgage broking team on 01707 872000 for a free initial mortgage consultation.’