Bank of England pushes on with another rate hike despite banking turmoil

The Bank of England has followed the ECB and the Federal Reserve with another round of monetary tightening, says our head of investment Victoria Scholar.

The Bank of England voted to raise rates by 25-basis points to 4.25%, in line with economists’ expectations. This is the 11th rate increase since December 2021 as the central bank approaches the peak of its rate-hiking cycle. However, the vote split was not unanimous with monetary policy committee members voting 7-2 in favour of a hike. Dissenters Silvana Tenreyro and Dr Swati Dhingra wished to keep rates on hold.

• Invest with ii: Share Dealing with ii | Open a Stocks & Shares ISA | Our Investment Accounts

The Bank of England has followed the European Central Bank and the Federal Reserve with another round of monetary tightening, focusing on the elevated inflation backdrop rather than the potential deflationary fallout from the turmoil in the banking sector. The central bank tried to alleviate concerns about the stress across financials, saying it will continue to monitor credit conditions closely, adding that the banking system remains robust, and liquidity is resilient. The Bank of England said the system is well placed to support the economy, including in a period of high interest rates.

In terms of the central bank’s forecasts, it issued a rosier assessment of the UK’s economic outlook, saying its Q2 GDP forecast will ‘increase slightly’ versus its February forecast of -0.4%, but its Q1 GDP forecast remains unchanged at -0.1%. It suggested that the latest inflation spike could be temporary, reflecting the volatile nature of clothing prices. It is sticking to its view that CPI should fall over the remainder of 2023, partly thanks to wage growth, which is seen falling back somewhat faster than expected.

• Day in the life of a fund manager: abrdn’s Thomas Moore
• 10 cheap growth shares for bullish investors
• Why Warren Buffett loves a stock market crash

Sterling bulls are in the driving seat with the pound extending its recent rally. The upswing for cable (GBPUSD) has been exacerbated by recent weakness for the greenback, under pressure after the Fed carried out a dovish hike on Wednesday. Meanwhile, the FTSE 100 remains in the red, underperforming wider European equities as the cost of borrowing in the UK becomes more expensive yet again.

For the estimated 1.6 million households on variable and tracker mortgage deals, this means more expensive monthly repayments, squeezing household budgets and in turn potentially dampening consumer spending. While higher interest rates are a boon for savers, with inflation stuck in double digits above 10%, real term savings rates unfortunately remain in negative territory.