Goodbye Hawkish Caucas? Fund Firms React to Rate Rise

The rate rise was not unexpected, but it has provoked questions about changing sentiment on the Bank of England's Monetary Policy Committee

Ollie Smith 17 March, 2022 | 12:54PM
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As the Bank of England's (BoE) Monetary Policy Committee (MPC) opts eight-to-one to raise interest rates by 0.25% to 0.75%, we round up the immediate reaction from the world of fund management.

Gurpreet Gill, macro strategist, global fixed income, Goldman Sachs Asset Management

We expect the Bank to proceed with caution, implementing 0.25% rate hikes until the policy rate reaches 1%, at which point it will likely pause the tightening cycle. That said, the case for data dependence and flexibility in the face of a war and ongoing global pandemic remains strong, suggesting the policy unwind will be more eventful for investors to navigate than in the past.

Vivek Paul, UK chief investment strategist, BlackRock Investment Institute

[It’s] an appropriate step given the UK economy is no longer in need of emergency policy support. Markets are betting that the Bank’s rate path from here will be extremely aggressive in the near-term. While we do see more policy tightening over the coming years, we believe there is excessive hawkishness in most developed markets. We think overtly aggressive rate hikes would exact a heavy toll on growth. Current market pricing points to a front-loading of rate hikes followed by a series of cuts, illustrating the risk of overtightening. Clear communication will be key, in our view, for the Bank to avoid creating confusion by over-tightening financial conditions and hurting the real economy.

Ed Monk, associate director, Fidelity International

The MPC […] will know that some of the most painful price rises being felt by households – such as those on energy, fuel and food – will not be brought under control by raising borrowing costs, but the fact they are acting anyway suggests they are worried about price rises feeding through to higher wages and becoming more ingrained. Risk-free assets like cash savings may receive a boost from interest rate rises but remain unlikely to keep pace with prices. Shares, too, face headwinds from rising interest rates, as well as the ongoing war in Ukraine, although more cyclical areas of the stock market may be able to keep pace better, albeit with extra risk.

Emma Mogford, fund manager, Premier Miton Monthly Income Fund

Adding higher borrowing costs to higher utility and food bills will likely contribute to a fall in disposable income this year. However, it is positive for the UK market that the Bank is proactively seeking to bring down inflation.

Paul Craig, portfolio manager, Quilter Investors

Ultimately a double digit inflation rate is not off the cards. [The Bank] is looking to build in some insurance now should there be a slowdown in economic growth or employment comes in worse than feared. With global risks and the Russia-Ukraine war having a significant economic impact, growth will be challenged and thus the Bank may need to reverse course later in the year. But for now it needs to follow the path to stop sterling devaluing further and intensifying the household squeeze through import prices and the global commodity sector, which is priced in dollars. Savings rates could improve from here which might offset some of the cost of living crunch, but with inflation proving difficult to contain it might all be a little too late.

Caspar Rock, chief investment officer, Cazenove Capital

“We continue to hold the view that there are several rate hikes to come. However, the Bank may tread more cautiously in the spring as it assesses the impact of the rise in National Insurance and the energy price cap. Looking forward, the prospects for further rate rises are likely to depend on the extent to which oil price rises feed through to other areas of the economy, particularly wages. From an investment perspective, volatility across global financial markets since Russia’s invasion of the Ukraine has encouraged investors to once again search for defensive asset classes. In the near term, the outlook for government bonds looks more challenging, with both nominal and real yields likely to continue moving higher from current low levels. We think alternative assets have an important role to play in diversifying portfolios in the current environment.

Chris Beauchamp, chief market analyst, IG Group

This is certainly not the event markets were expecting – a 25 bps point hike accompanied by stiff hawkish language would have helped the pound hold its nerve, but the shift in voting and the apparent disappearance of the hawkish caucus from last time around, plus the change in language around further tightening suggests that the developments of recent weeks means that a “wait and see” strategy now prevails on Threadneedle Street. That is fair enough, given all the developments, but it means a slower response to inflation and more pressure on consumer spending. Ultimately, whichever way they moved would have brought criticism about its impact on household spending and the broader economy, but the bank seems to think erring on the side of caution is best for now.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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