Snapshot

Bank of England fails to keep up with Fed


The Bank of England (BoE) has raised its main policy interest rate, or the Bank Rate, from 1% to 1.25%, in line with consensus expectations. The move, however, disappointed investors who were hoping for a larger rise following the 0.75% increase in the US federal funds rate yesterday.  

Three of the nine-member committee once again voted for a larger 50 basis point (bps) rise, but the majority felt the smaller increase was more appropriate. As a result, the pound has fallen by around a third of a percentage point against the US dollar, and half a percentage point against the euro.

In its statement, the BoE mentioned that recent growth data had been weaker than the committee had expected, as consumer confidence has fallen further along with businesses sentiment. The bank said that the labour market remains tight, even if unemployment rose slightly in the three months to April.

Meanwhile, the Bank has continued to warn of higher inflation, raising its estimate for the peak from 10% to 11% for October. Inflation is then expected to fall back, although higher oil prices of late could mean it proves stickier.

Looking ahead, we expect the Bank to deliver a 25 bps hike in each meeting until February 2023, peaking at 2.25%. However, the risk is skewed towards even more rises, as signs of “second round” inflation pressures are becoming more evident, even if the BoE is not concerned by them yet.

Second round pressures can occur as higher wages drive inflation higher still, at risk of round after round of wage and price rises, as expectations of inflation become a self-fulfilling prophesy.

Money markets have a more aggressive hiking path, with investors expecting the Base Rate to reach just over 3% over the same time horizon. If the BoE continues to hike more slowly than market expectations, then we are likely to see the pound weaken further against other major currencies.

 

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.