The widely-anticipated decision by the Bank of England to increase rates at this week’s monetary policy committee has been described as mistimed, odd and difficult to justify, although not all investors believe the decision was wrong.
The central bank raised rates for the first time in a decade today with the rate moving to 0.5 per cent from the 0.25 per cent rate that has been in place since August last year in response to the Brexit referendum.
“In truth, the timing of this rate rise now seems mistimed,” says Close Brothers Asset Management CIO Nancy Curtin.
M&G Investments fixed income investment director Anthony Doyle said the move was “difficult to justify” due to political uncertainty surrounding the UK’s exit from the European Union.
Fidelity International chief economist Anna Stupnytska agrees, stating Brexit is already holding back the UK economy and is likely to have a significantly detrimental impact on domestic demand.
Stupnytska described the hike as an “odd” decision and that the Bank of England had “painted itself into a corner” by talking up a November rate hike.
“It may have been intended to put a floor under sterling and fire a ‘warning shot’ against some pockets of excessive credit build-up,” she says. “It may have been a way of placating the more hawkish elements on the board, knowing that one hike alone is unlikely to have a material impact on the economic outlook.”
Curtin points out retail figures and construction data have taken significant hits in the last month. “Yes, GDP increased by 0.4 per cent last quarter, but the UK has fallen from highest growth rate in the G7 to the lowest,” Curtain says.
Productivity is worrying Hargreaves Lansdown senior economist Ben Brettell. “It’s easy to argue today’s rate hike is just as unnecessary as last August’s cut,” he says.
Uber, Amazon and Netflix are disrupting traditional industries, while technological changes keep wages low, Brettell says. At the same time, baby boomers are retiring and easing back consumption as the generation behind is saddled with debt struggles to get on the housing ladder.
However, Tiley Bestinvest managing director Jason Hollands says the decision simply reverses the cut made in the immediate aftermath of the Brexit referendum.
Hollands says in hindsight the cut may have been “overhasty” and predicated on a much more “gloomy prognosis” about the immediate impact of the Brexit vote than what subsequently transpired.
He notes consumer spending is facing real headwinds as inflation outpaces wage growth, but argues much of this is attributed to sterling weakness that should pass through.
Chelsea Financial Services managing director Darius McDermott also believes the cut to 0.25 per cent was “probably a mistake” and an overreaction.
However, he argues there is no need for investors to alter portfolios as a result of today’s reversal and argues Brexit and the squeezed UK consumer mean the monetary policy action is more likely a “one and done” scenario for now.
FE analyst Thomas McMahon agrees that “worrying signs” in the UK economy mean further rate hikes are unlikely. “The longer term economic picture for the UK is likely to remain cloudy at best due to uncertainty around a post-Brexit deal with the EU and the inevitable brinksmanship and posturing of the negotiations,” McMahon says.
Liontrust head of multi-asset John Husselbee also thinks the rate hike is simply a reversal of a “premature cut” in the aftermath of Brexit rather than the start of a sustained tightening cycle.
However, Husselbee’s colleague in the Liontrust macro-thematic team Jamie Clark says the move indicates higher rates in the future.
The economic recovery of the UK and other Western economies no longer makes “depression-era monetary policy” appropriate, Clark says. The team has a tilt to value and expects bond proxies and growth stocks to underperform from monetary tightening.
AJ Bell investment director Russ Mould points out Libor is 0.75 per cent for 12 months’ time implying markets expect one more 0.25 per cent increase by this time next year.