BoE hikes rates once again to combat rising inflation
Rather unsurprisingly, the Bank of England’s Monetary Policy Committee (MPC) has decided once again to increase interest rates, marking the third consecutive hike and taking base rate to 0.75%.
The move comes as the central bank attempts to cool inflation, with prices continuing to rise at the fastest rate in about 30 years. The inflation figure currently sits at 5.5% but is forecast to reach 8% next month and potentially even higher later in the year.
The hike sees interest rates return to where they were before the Covid-19 crisis started two years ago, but we expect further increases to follow, given our view that inflation is likely to remain above the 2% target, even once the short-term impact of COVID-19 and, hopefully, Ukraine fade over the next twelve months.
The previous decision almost saw the MPC vote in favour of a double rate hike, but this time around it wasn’t quite as convincing. For the first time in a while, the decision to hike interest rates was not unanimous, but there was still a strong majority favour of 8-1. Deputy governor Jon Cunliffe voted to leave rates at 0.5%, arguing that Russia’s invasion of Ukraine could “increase uncertainty and decrease consumer and business confidence”.
We remain calm, despite the decision, for a number of reasons, with the primary one being that the rate hike had already been priced in – it would have been more surprising if the decision had been to NOT increase rates. Secondly, there has (so far) been very little real-world impact of the previous hike and the actual economic cost of this rise is unlikely to be significant, as interest rates continue to be at historic lows.
A number of our existing tactical positions help protect our portfolios against inflation. However, these are not responses to higher inflation, but are rather more considered positions based on our assessment of the economic environment, where over the next few years we see higher inflation, but also expect to see higher growth. Our allocations are representative of that, as we remain underweight in bonds, overweight in cyclical equities and continue to invest in healthcare, where prices are inelastic.
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