After the Bank of England raised interest rates this week for the 12th consecutive time, investment managers assess what this means for the macroeconomy, investors and mortgage holders.

The Bank of England raised interest rates by a further 0.25 points this week to tackle soaring inflation which remains in double digits, increasing the base rate to 4.5 per cent.

The bank’s monetary policy committee voted by a majority of seven to two for the hike, representing a new interest rate high not seen since 2008, and a total increase of 440 basis points in 18 months. BoE governor Andrew Bailey told a media briefing: “We have to stay the course to make sure inflation falls all the way back to the 2 per cent target.” The bank is now forecasting inflation to fall to 5 per cent by year-end and for the UK to avoid a recession.

Here are some reactions from investment managers on what the rise means for the macroeconomy, investors and mortgage holders.

Shane O’Neill, head of interest rates at Validus Risk Management 
“The biggest news from today’s release is the changes to projections – inflation projections were increased across the forecast horizon and GDP projections got a major boost, with the BoE now expecting the UK to avoid a recession. Quite the change from the eight quarters of declining growth projected a matter of months ago. Surprisingly, good demand in the economy, lower energy prices and a more resilient labour and housing market is seemingly giving the BoE the confidence required to continue tackling inflation.

“From this release there doesn’t appear to be a target rate in mind, but rather we’re looking for a rate which gets the job done on the inflation front. Markets continue to price an additional 50 bps of hikes, coming over the next two to three meetings – though not a game changing meeting, this definitely errs on the more hawkish side of recent BoE communication and should support the strength seen in GBP [sterling] against the USD [dollar] and EUR [euro] over recent weeks.”

Matthew Cady, investment strategist at Brooks Macdonald 
“With the decision split seven to two in favour of a hike, the language from the Bank appears to suggest bias for another hike, given that they see risks around their inflation forecast as “skewed significantly to the upside.” The hawks will be quick to point out that inflation is still too high, with the latest consumer prices annual rate of inflation running at five times the Bank's 2 per cent target, the doves at the Bank will no doubt be urging patience, emphasising that interest rates work with a lag on the real economy, and that time is needed for past hikes to do their job.

“The Bank has also updated its latest quarterly economic projections, anticipating both higher inflation and economic growth. This inflation-economic growth trade-off mirrors the dilemma many central banks globally have faced recently. A stronger economic outlook is certainly good news, but it poses the risk of more persistent inflation pressures. Markets could be in for a bumpy ride.”

Andy Mielczarek, founder and CEO of SmartSave, a Chetwood financial company
“One upside for rapid interest rate rises is that consumers and investors should get more interest on their savings. But interest rates for easy-access accounts have often not kept pace with hikes to the base rate, which means that people could be losing out on potential gains on the money held in traditional accounts. For those in a position to put aside a lump sum and allow that pot to grow, it's vital that savers explore how different savings' instruments can support their financial goals. In many cases, fixed-term, fixed-rate bonds can offer much higher interest, while many savers will benefit from looking beyond traditional high street banks."

Daniele Antonucci, chief economist and macro strategist, Quintet Private Bank (parent of Brown Shipley)
“The important message is that the Monetary Policy Committee’s statement seems to validate market expectations that, while the key policy rate will rise somewhat further, it will likely peak close to 5 per cent. With US inflation falling from 9.1 per cent at its peak to 4.9 per cent currently, our view is that the latest Federal Reserve hike will likely be its last of the year and the final one in its rate hiking cycle. As the UK appears to have a worse inflation problem than the US, the Bank of England looks set to raise rates somewhat more, perhaps once or twice, before pausing for the rest of the year. Given that the eurozone seems to have a rather uncertain inflation outlook as well, the European Central Bank may raise for a little longer too, but should also bring its tightening cycle to an end.”

Toby Sturgeon, global head of fiduciary investment services at ZEDRA
“They upgraded their forecasts for both inflation and growth significantly with a more encouraging outlook for a more resilient economy. A cumulative 2.25 per cent upgrade to their GDP forecast was the biggest upgrade on record. The Bank still expects inflation to fall quickly this year, forecasting 5 per cent by year-end and meeting their 2 per cent target by late 2024 before falling to 1.1 per cent in two years' time. Sterling and UK gilt markets were largely unmoved despite the upgrades.”

Jatin Ondhia, CEO of Shojin
"With inflation still running hot, it remains to be seen how much further monetary policy intervention will be required to restore price stability in what has been an historic series of hikes. Undoubtedly, investors will be hoping that the summit may be drawing near, but for now, the Bank of England’s tricky juggling act looks set to continue. Going into the second half of the year, agility and diversification will be key in navigating the shifting macroeconomic landscape as the tightening of financial conditions continue to feed through into the economy.” 

Mike Stimpson, partner at UK wealth management firm Saltus
“The interest rate increase to 4.5 per cent announced by the Bank of England is going to have a continued impact on millions of mortgage holders across the UK. For those who are on a variable rate, the impact will be immediate albeit only a 25 bps increase on their current rate. For the 1.4 million households who have a fixed term coming to an end in 2023, they will see a significant increase in their monthly payments going forward, as around 60 per cent of these were fixed below 2 per cent.  

“Saltus’ latest Wealth Index report revealed that 78 per cent of the 2,000 people surveyed envisaged monthly mortgage repayments rising to a level that would place a strain on their cashflow. High net worth individuals are also not immune to the impacts of these changes, as more than eight in 10 of those with a mortgage said that rising interest rates will place or had already placed a strain on their cashflow – with the biggest group impacted being those aged between 35 and 44 years' old. One in four HNWI respondents said they would sell other assets to finance rising mortgage costs in the event of significant rate rises.”

Giles Coghlan, chief market analyst, consulting for HYCM
"Given that annual inflation remains stubbornly above 10 per cent, today's decision to raise the base rate by 25 bps again was almost unanimously anticipated by the markets. With wage growth data coming in hotter than expected a few weeks ago, fears of a wage-price spiral have only grown since March and the economy has not cooled to the extent that Bank of England policymakers will have hoped. Right now, core inflation remains sticky at 6.2 per cent year-on-year and investors should expect rates to go higher in the summer even if headline inflation falls sharply, particularly as the markets are now expecting a terminal rate of 4.85 per cent. On a brighter note, the BoE are not forecasting a recession for the UK and have revised GDP up for next year to 0.75 per cent from a prior projected fall of -0.25 per cent.”

Nicholas Hyett, investment analyst, Wealth Club
"The Bank expects inflation to trend down as major shocks from last year, like the higher oil prices caused by the war in Ukraine, start to drop out of the numbers. With inflation falling towards 5 per cent by the end of the year that should take the pressure off wages, and will reduce the chance of inflation getting locked into future expectations. Food prices remain a concern, and the Bank has left the door open to further rate hikes, but the worst-case inflationary scenarios now look unlikely. The economy is also looking healthier than the Bank had previously forecast which, given that it had expected a year long recession not so long ago, is a relief. The economy is expected to post modest underlying growth in the first half of this year, and continue to expand into 2024."