Commentary: Bank of England Hikes Rates By 0.25 Percent

LONDON (Capital Markets in Africa): The Bank of England has raised the base rate from 4% to 4.25%. This is the 11th consecutive rise and seven members of the nine-person Monetary Policy Committee supported the quarter of a percentage point increase.

Marc Cogliatti, Head of Global Capital Markets at Validus Risk Management: “As widely expected, the Bank of England raised rates by 0.25% at today’s meeting, taking the base rate to 4.25% — its highest level since 2008. The decision comes in the wake of a higher-than-expected UK CPI reading, which reaffirmed the dilemma facing the MPC. On the one hand, they want to avoid heaping undue pressure on the UK consumer at a time when everyone is having to overcome the rising cost of living. But on the other, the committee needs to ensure that inflation does not escalate further, therefore adding to people’s woes.

Although another 25 bps hike is fully priced into the market by June, there is little expected beyond there. In our view, this underestimates the risk of rates having to go higher in the months ahead to avoid inflation expectations becoming further embedded and CPI spiralling further out of control. The FPC’s assessment is that the banking system is ‘resilient.’ If the MPC are not concerned about the banking system, it is a further reason why they might feel comfortable raising rates again in the months ahead.”

Douglas Grant, Group CEO of Manx Financial Group: “Today’s rise in interest rates was expected after Wednesday’s surprise inflation jump and the recent turmoil in the banking sector, and it is yet another blow to businesses struggling to survive another cashflow squeeze. SMEs must take this as a reminder to review their existing lending structures and ensure they are prepared for further hardship. While improving GDP data provided a glimmer of hope for small businesses, the interest raise is a worrying number and indicates that a recession is likely to afflict the UK in 2023 as the Bank of England remains hawkish in its approach.

Many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, but it is now too late for other businesses that were not as forward-thinking. As businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis, demand for working capital will continue to rise. Our research reveals that over a fifth of UK SMEs that required external finance over the last two years were unable to access it. Moreover, over a quarter of SMEs have had to stop or pause an area of their business due to a lack of finance. The lack of availability of finance is costing SMEs and the UK economy in terms of growth at a time when it is needed the most. The level of growth that is being prevented is significant and will require novel solutions to bridge this funding gap.

Despite positive introductions and extensions to loan schemes last year, such as RLS Phase 3, more proactive action that what we saw in last week’s Spring Budget is needed. Since the pandemic-caused economic turmoil, we have been calling for a sector-focused permanent government-backed loan scheme that brings together both traditional and alternative lenders to guarantee the future of our SMEs. As the government looks for ways to power the economy’s resurgence in 2023, the importance of a permanent scheme cannot be understated. It could act as the fundamental difference between make or break for many companies and, in turn, our economy. We hope this becomes a reality.

Charles White Thomson, CEO at Saxo UK: “The UK is in an economic danger zone. I am an advocate for bold plans which will unlock the UK’s potential and to break the high tax and low growth loop, but the status quo is increasingly painful and uninspiring, and this should not be about celebrating recent monthly GDP growth of an anaemic 0.3% and the avoidance of a technical recession. The UK continues to underperform its key counterparties and have underserved the majority and their aspirations. Change is required.

As opposed to talking of the Chancellor and Government, I prefer to continue referring to the UK as a PLC.  Instead of Prime Minister we have a Chief Executive Officer and for the Chancellor, a Chief Financial Officer. My resounding conclusion from the UK PLC’s recent financial statement – or budget – is that the management team are in an unenviable position in that there is little wiggle room for large change. The UK PLC is effectively in a financial straitjacket with constraints including: £2.4 trillion public debt and all the servicing costs this entails, tax to GDP levels approaching record highs or 37.5% and corporation tax moving to 25% from 19% for financial year 2023/24.  Financial outlook statements for generations of UK PLC management have concentrated on the status quo as opposed to a more dramatic plan to seriously kick start growth, confidence, and the all-important upside this brings.

We have an advantage in that UK PLC is the sixth largest global company or economy in the world with all the scale and reach that this brings. This is about a bold and large plan to ensure that we deliver on its full potential and unleash the prosperity that a large part of the UK shareholders want. The alternative to a bold and wide changing economic plan, which is not purely based on industrially low interest rates and quantitative easing, is continued stagnation and underperformance. This will not be easy, but the alternative is to sell out the next generation which should never be a consideration.

Jon Causier, Partner at global consultancy Simon-Kucher & Partners: “This week’s inflation figures left the Bank of England with little choice but to raise the base rate once again today. In the wake of the recent troubles within the banking sector, it will be interesting to observe to what extent the increase is passed on to depositors. Although the UK’s leading banks have been coming under political pressure to increase the rates they pay to depositors, they are likely to be net beneficiaries of any flight to quality and may be reluctant to incentivise further deposits given reduced demand for lending.

Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’A banking curve ball has been thrown into the Bank of England’s already tricky juggling act, but for now the eye of policymakers is still firmly trained on catching inflation and bringing it under control. The hotter than expected temperature of consumer prices in February, and the tight labour market are cause for concern, amid worries inflation could still become embedded in the economy. It wasn’t a unanimous decision though, with the Monetary Policy Committee split on what to do, given how rapidly the sands have been shifting. The pound has climbed higher above $1.23 adding to gains already made amid widespread expectations of this rate rise.

The knock-on effects of the banking scare are still hard to determine, and with lending criteria expected to be tightened and loans set to be harder to come by, a forecast deterioration in financial conditions is likely to be the equivalent to further interest rate rises in the months to come. Inflation was already expected to drop sharply by the end of the year to around 2.9% and if consumers and companies find it harder to access credit, it’s likely to be a fresh disinflationary force. So, in May policymakers are expected to press pause on rate hikes, as the lag effect of tightening across the economy comes into play.