When the Bank of England chose to hold rates at a record low 0.1% there was a certain amount of shock in the Square Mile. Michael Brown at trading house CaxtonFX tweeted: “That’s what was left of the BoE’s credibility shot to bits.”
That seems harsh, but Mr Brown is not alone in so feeling. Has the Bank bottled it, AJ Bell asked?
Markets had priced in a rate rise after hints from Bank of England governor Andrew Bailey and chief economist Huw Pill that they could vote for a hike. Futures bets had unwound a bit in the last few days, but by City reckoning there was still a 58% chance of rates rising. Which either tells you that the Bank got its messaging wrong, or the City just made a hash of it (I’m going with the second option.)
In truth, today’s vote on rates wasn’t even close. The MPC voted 7-2 to leave it alone.
The Bank’s prediction that inflation will now rise to 5% -- it previously said 4% -- gives some credence to the view that Threadneedle Street is behind the curve on inflation. The Bank still says inflation will pass; not everyone agrees.
Why did the Bank hold fire? Plainly, it remains concerned about the economic recovery from the pandemic. It wants to give the economy every chance to become strong enough to withstand an increase in borrowing costs before it actually puts them up.
Ed Monk, associate director at Fidelity International, said: “Maintaining rates at their current emergency low level underlines that the Bank still views growth as being fragile.”
What happens next? A rate rise is coming - if not in December, then surely in February.
“It seems inevitable that the Bank of England will raise rates at some stage but borrowers have been given a reprieve for now,” Monk said.
Marchel Alexandrovich, senior European economist at Jefferies, said: “The BoE chose to stay put at today’s meeting, but is clearly getting closer to a rate hike.
“On the BoE’s forecasts, if interest rates do not rise next year, inflation will end up at 2.6% in 2024 – a significant overshoot relative to the 2% target. This is a clear signal from the BoE that rates will need to rise gradually over the coming months.”
The MPC flagged rate rises in the post. It said today: “We expect interest rates will need to rise modestly to return inflation to our 2% target.”
If you are a mortgage borrower, the advice is clear – fix your mortgage before rates go up. Many banks have already pulled their cheapest fixed rate deals off the market, and they aren’t coming back.
If you are a retail investor trying to save for a retirement, what do you do now?
Ben Kumar, senior investment strategist at 7IM, said: “As interest rates grind up government bonds will still protect portfolios but they still aren’t going to generate much in the way of returns. Investors should be looking for opportunities now that are designed to do well in rising-rate environment, even if the prospect of rate rises is far in the future as it is only a matter of when, not if.
“Being positioned to be underweight in government bonds, overweight in alternatives, overweight in value and underweight in tech are good examples of what investors can do to start preparing for rising interest rates.”
Even though the Bank didn’t move today, it is still likely to go ahead of the US Federal Reserve. This week the Fed said the world’s biggest economy would be threatened by a rate rise just now.
Dean Turner at UBS Global Wealth Management said: “We should still prepare for a hike in the coming months. It is clear that, if the economy moves broadly in line with expectations, interest rates will be going up, maybe as soon as December. However, the pace will be gradual, and the peak will be lower than markets were expecting going into the meeting.”
So industry has more time to prepare for higher costs, but perhaps not long.
Douglas Grant at Manx Financial Group said: “Businesses across the UK will breathe a sigh of relief for now…… Rising interest rates, higher inflation and lower UK GDP are regrettably just round the corner though. Both raw material and labour costs are set for an upward trajectory which will have to be passed on to the consumer.”
Alastair Douglas at TotallyMoney said: “It’s a delay of the inevitable - we know a rate hike is just around the corner. And, while today’s decision gives people a bit more time to prepare, when it comes it may be the start in a series of rises that will make the cost of borrowing more expensive than expected and push those who are just about managing to, quite simply, not managing.”