Bank to raise rates next week

Luckily, most of our clients have fixed rate mortgages at lower rates so will not be immediately impacted by higher interest rates in the short term. The Bank of England has been behind the curve on inflation, and should have raised rates earlier. The level of inflation has caught them completely unaware. Higher rates however will have less of an impact as UK inflation is driven largely by external factors such as energy, tight supply chains and Brexit, which has made hiring more difficult, increasing wages. Higher rates should, however, serve to cool the housing market. Except for Brexit, the other factors are transitory and inflation should come down over the next two years to 2% (as forecast by the Bank of England). The UK government bond market is predicting rates will peak around 2-2.5% by the end of 2023. We are not advising clients with long-term horizons to make any changes to their portfolios. Long term, the only inflation beating investment is equities if history is our guide. Cash should be held for emergencies and for any major purchases in the next five years. The fact that rates on cash have moved higher helps a little. Bonds have had a tough time this year but long term will serve their purpose as volatility dampeners, and will prove useful when we head into the next recession and interest rates come down again. The UK, however, has a tough economic outlook given the political situation and the effects of Brexit, and we will continue to see Sterling under pressure. Hence we stick by our preference for global allocations and would not want a UK weighting higher than 5% in a global equity portfolio, in line with global equity indices such as the MSCI ACWI. This is not 2008. In that year, unemployment soared, the housing market and stock market crashed, and people were genuinely worried that the global financial system would collapse. This is not the case now. We have just emerged from a once in a century pandemic and global lockdown, and it is only natural that we now undergo a period of adjustment and disruption as we try and get back to normal. The war in Ukraine and the effect of the Russian sanctions on oil and gas prices is a concern, however, and we will need to see how this plays out.

Whilst many predict yet another Bank of England base rate rise, few believe that this will dampen inflation. Our economy is faltering and the current high level of inflation is not the result of an overheating economy, so raising rates further might do more harm than good. Surely the Bank of England must also consider the risk of a recession and how the current cost of living crisis is having a devastating impact on many families. We have already seen huge rises in mortgage rates and further base rate rises will push more and more people into financial crisis. Understandably, we are seeing more and more clients taking out longer term fixed deals when remortgaging, giving them that much needed stability. With inflation set to rise further, together with the highest tax burden in more than a generation, the future for potentially millions of people is very bleak indeed.

The Bank of England's dilemma is if they don't raise rates, and the Fed and European Central Bank do, the pound will fall even further. This, of course, is inflationary as it pushes up the cost of imported goods, including food and oil. There probably needs to be an agreed approach amongst the G7 regarding monetary policy, but whether that's likely or not is anyone's guess. Some lenders price in rate increases before an expected base rate hike, others wait until after. But further interest and mortgage rate increases seem almost certain until inflation shows signs of coming under control, which doesn't seem imminent.

The current interest rate of 1% is unsustainable if the economy is ever going to stabilise in a fashion that balances savers', businesses' and borrowers' needs. Before the Credit Crunch in 2007/08, interest rates very rarely dipped below 5% with inflation averaging around 4% with some short sharp peaks to 8% in the early 90s. Since the Credit Crunch the interest rate hasn't gone above 1% in over 12 years, which hasn't been too much of an issue until the gut-busting levels of inflation we are now seeing, moving towards 10% and beyond. The invasion of Ukraine will have had some influence on inflation but considering we had a sustained period of controlled, measured inflation and interest rates during the Iraq War (pre credit crunch) from 2003 to 2008, it is unlikely the current instability in the Ukraine is having as much effect as the impact of Brexit on inflation. A projected interest rate rise up to around 3% by 2024 seems to be a sensible compromise but it will be a hell of a shock to borrowers and home owners that have only ever known sub-2% interest rate mortgage products. The current crisis is potentially more dangerous than the Credit Crunch as we seem to have a Government that has no idea on what the problems are and how to solve them. Inflation is just a fancy way of saying prices have gone up. Food prices and fuel costs are the key items that the government must focus on to stave off serious financial difficulties for working class families. Interest rates are irrelevant when over 50% of the cost of fuel from the forecourts is VAT and duty whilst wholesale energy providers benefit from falling prices without passing them on to consumers. Tax, duty and the lack of competition for the big six energy suppliers can be directly influenced by central government. A reduction in VAT and increasing competition for energy suppliers will result directly in money back to everyday working people and businesses, whereas a quarter of a percent increase on savings will barely register.

Like King Canute, the Bank of England will no doubt raise interest rates, not because they expect to turn back the tide of inflation, but to show that they are in fact powerless to do so. We appear to be locked in a vicious spiral that is more dangerous than the Global Financial Crisis. Stagflation is being whispered about by many in the city. Raising interest rates at this time threatens companies that were already weakened by the global pandemic. The rising cost of debt combined with inflation risks forcing many businesses under, which at some point will impact the labour market. As much of our inflation is imported you have the seeds of a perfect storm. We require some bold contrarian thinking by the Bank of England, but unfortunately Andrew Bailey is unlikely to provide this. He appears happy to go down with the ship shouting "I told you so".