BoE lifts rate to 3% and signals lower than expected future rises
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The Bank of England has increased the Bank Rate to 3% from 2.25% in an effort to bring down soaring inflation. Its comments that rates would peak lower than markets are pricing were welcomed by the finance sector, but union Unite argues that profits by the UK’s top companies have not shown any weakness, lambasting the Bank and policymakers for putting the burden on ordinary people.
The Bank of England’s Monetary Policy Committee has voted by 7 to 2 that a rise to 3% was needed to get back to the 2% inflation target. Recent figures showed no signs of high inflation abating, with the consumer prices index up by 10.1% over the 12 months to September.
A steep rise had been widely anticipated, but some do not expect the next increases to be as significant. Tim Graf, head of EMEA macro strategy at fund house State Street, doubted there would be further increases of this size. He argued that the accompanying messaging by the Bank “was clearly dovish”.
Graf also pointed to signs of weakness in consumption and the growing vulnerability of the UK’s “all-important” housing sector. Interest rate rises feed through to the mortgage rates lenders demand from borrowers, raising questions over the resilience of mortgage-payers to large rate hikes.
Jamie Niven, a senior fund manager at Candriam, said it felt peculiar to describe the largest hike in 33 years as dovish, “but maybe nothing should be surprising when it comes to the Bank of England these days”.
The MPC’s explicit statement that rates would be lower than market forecasts is telling, said Niven. "The implications here are that the BoE has done the majority of what they feel they need to do and we may not even see a 4% handle on the base rate. Given the underlying economic challenges for the UK and the lag in the impact of recent hikes, I tend to agree,” he said.
No real let-up for savers
The rise to 3% is good news for savers, but higher interest payments on cash savings are a long way off bridging the gap created by high rates of inflation, said Jenny Holt, managing director for customer savings and investments at insurer Standard Life, part of Phoenix Group.
“Our analysis shows that even with an interest rate of 3%, higher than what is currently available on almost all easy access savings accounts, savings of £10,000 will be reduced to around £8,500 in real terms after two years if inflation remains at 10%. These figures highlight the importance of ensuring your savings are working as hard as possible for you,” she said.
“For those able to take a longer-term view, putting cash into investments via an ISA or pension provides the potential for returns that can match - or even beat - inflation over the longer term as well as additional tax efficient benefits,” she added.
How is the burden shared?
But union Unite criticised the Bank of England’s decision, saying the causes of inflation can be sought in profiteering, arguing that profits in Britain’s top companies are up by 47%.
General secretary Sharon Graham said: “Britain is suffering from an epidemic of profiteering, in every sector of the economy. So it remains remarkable that, despite all the evidence, the Bank of England is refusing to acknowledge that profiteering must be tackled to deal with inflation.”
She accused the Bank of England and the Treasury of wanting “workers and communities to pay the price every time. They attack wages, they line us up for another round of austerity and now they pile on more misery for those already with personal debt burdens. These are choices and they don’t have to make them. We have to ask again - who is benefitting from this broken economy?”
The FTSE 100 index has been pushed up after oil majors reported bumper profits as a result of Russia’s invasion of Ukraine.
A survey of 6,000 adults sponsored by Unite found more than half (54%) say they can’t or will have difficulty paying their household bills this year, and more than a quarter (27%) have already gone into debt or increased the levels of their debt to put food on the table, while 14% face food poverty. A report on financial resilience by Legal & General Retail showed UK households live just 19 days from the breadline on average.
Where do you see the Bank Rate, the economy and labour disputes going?
