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The Bank of England has increased interest rates by 0.25% to 1%. Higher interest rates were expected by the market as inflation continues to hit multi-decade highs and the Bank feels it needs to show that it’s serious about the threat of inflation.

Interestingly, the Bank now thinks that inflation will peak at over 10% in the latter part of 2022, the highest level since 1982. The current conflict in Ukraine and the continued lockdowns in China are going to put further upward pressure on the rate of inflation and this is expected to be one of many interest rate increases during 2022.

“The Bank has a difficult balancing act though as the current cost of living crisis combined with higher interest rates and higher taxes means that the growth outlook for the UK is gloomier than it has been since the dark days of Covid, and we’re likely to see a material slowdown in economic activity throughout 2022,” said Dan Boardman-Weston, CEO of BRI Wealth Management. “The Bank will need to tread carefully and not raise rates too quickly or too aggressively otherwise they risk tipping the economy into a deeper recession.”

The inflation continues to be largely supply driven and interest rate increases are not going to assist with these contributory factors to inflation, Boardman-Weston explained. 2022 will likely be a pivotal year for monetary policy. The risks of a misstep and a recession have increased significantly.

Rates reach pre-financial crisis levels

UK rates are now sitting at a level not seen since the financial crisis of 2008. Unlike the March meeting, however, the vote was 6-3, with the minority wanting to raise rates by 50 basis points. Despite being one of the more hawkish central banks at the start of the year, last month Governor Andrew Bailey noted they are walking a “very tight line” between tackling inflation and avoiding recession. They softened their language slightly on future rate increases as there are signs of a slowdown with consumer confidence close to record lows and retail sales falling two months in a row.

“Today’s announcement saw them remove the word “modest” to describe future rates increases, hardening their stance,” noted Victor Lam, Fiduciary Investment Specialist at ZEDRA. “Inflation is potentially set to hit double-digits later this year for the first time since the 1980s and the labour market remains tight, so future increases are still expected despite the risk of recession. Sterling is at a 21-month low versus the dollar due to worries on the economic outlook in the UK and fell below $1.25 following the announcement.”

The stage is set for a pretty bleak winter of discontent with the economy heading into reverse and little end in sight to rising prices given the ongoing toll the war in Ukraine is having on commodity markets. The oil price has marched up even higher today, with Brent settling above $110 dollars a barrel after the EU moved to ban most Russian crude imports.

“Increasingly choppy waters”

“With inflation sitting at a 30-year high of 7%, today’s dovish hike is a sign that policymakers are now entering increasingly choppy waters when it comes controlling the inflation narrative,” observed Giles Coghlan, Chief Analyst at HYCM. “Generally speaking, the BoE does not want to see inflation entering strongly into wages. Once it does, the issue becomes systemic and generates a force of its own, which becomes exceedingly difficult to control.”

The Bank is still taking a softly-softly approach when it comes to rolling back its huge bond buying stimulus programme to avoid tantrums in the bond markets in the form of spiking yields which would make borrowing much more expensive. It’s kicked the roll back of its quantitative easing programme into the long grass, with only an update planned at the August meeting on whether to start sales. For now in the words of Harry Styles currently sitting at no.1 in the charts – it’s keeping its stimulus policy ‘As it was’.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Michael Morton

Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

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