On Thursday (2 August), the Bank of England’s Monetary Policy Committee voted unanimously (9-0) to raise the UK benchmark interest rate by 25 basis points to 0.75%. Here, ReachX compiles a round-up of responses to the move by our panel of experts and wider market commentators.
GBP risks still to the downside
ReachX panel expert Adrian Schmidt said the UK central bank’s move had been well flagged and the decent UK data this year has justified some reduction in monetary accommodation.
"Part of the reason for higher rates is that the BOE sees weaker potential UK output rather than stronger expected output, so that moderate demand growth is expected to outpace somewhat sluggish supply growth. This is less of a positive for the currency than a combination of strong supply and stronger demand.
"However, the elephant in the room is the uncertainty surrounding Brexit. The BOE is assuming a 'smooth' transition, which, given the current state of political negotiations both within the UK and between the UK and the EU has to be seen as an optimistic view. Even on this view, UK growth performance is not expected to outperform any of the major countries. The risks therefore look to be primarily on the downside for growth, and consequently for GBP."
Don't expect another hike before August 2019
Karl Steiner, Economist at Nordic Bank SEB, opined: "The rate hike was widely expected. However, the unanimous vote (9-0 vs 3-6 in June) was less expected, adding a hawkish tone to the decision. Also, the BoE’s wording at the end of its statement has a hawkish tone as it judges that if the economy develops in line with their projections ‘an ongoing tightening of monetary policy over the forecast period would be appropriate.’
"However, mitigating the hawkishness was the BOE’s first projection of the neutral rate, comments made by Governor Mark Carney during the press conference, as well as the end of the released statement which states any future increases in Bank Rate are likely to be at a "gradual pace" and to a limited extent."
As such, Steiner doesn’t expect another rate hike until August 2019 as growth remains weak. "Furthermore, at SEB we believe UK inflation is on its way down (possibly to be at target at the end of 2018). Also, the UK will officially withdraw from the EU in March 2019, which probably will create uncertainty and will further weigh on economic activity."
Hawkishness laced with caution
David Lamb, Head of Dealing at FEXCO Corporate Payments, said that despite the hawkishness behind the decision, the meeting's minutes were laced with the "caution and caveats" meaning the prospects of a further rate rise look slim.
"This rise is likely to be a case of ‘one and done’. Though the economy remains fragile, this modest rate rise has been carefully calibrated to rein in the dangerously high levels of consumer borrowing without knocking growth off course."
Premature and unnecessary
The BOE decision was labelled as "premature" by Nigel Green, Founder and Chief Executive of deVere Group, of one of the world’s largest independent financial advisory organisations.
"Hiking interest rates now – for only the second time since the financial crash – is, to my mind, premature. At just above the BOE's target of 2%, inflation is not currently a key issue. In addition, major uncertainty surrounding Brexit, the looming threat of international trade wars, and absolutely average economic growth, business and consumer confidence are on the slide.
"As such, there seems little real justification to increase interest rates now. Has the decision been motivated in order to protect reputations and credibility after the Bank’s Governor and some of the committee had effectively already said the rise would happen?
"Whilst the decision to hike rates is unnecessary, I think that the BOE is likely to refrain from any more increases until after Brexit," Green concluded.
Savers will see little immediate benefit
Tim Bennett, Partner at Killik & Co, said the move might be good news in principle for UK savers, but they will likely see little immediate benefit.
"That's because the mounting uncertainty surrounding Brexit, ongoing rumblings around a possible international trade war and a mixed bag of recent economic data, including relatively static inflation, all raise the possibility of an interest rate pause and perhaps even a U-turn before the end of the year. As a result, the vast majority of cash savings rates are likely to continue to lag inflation, meaning investors should look elsewhere to earn real (above-inflation) returns."
