Commenting on today’s 0.5% interest rate rise from the Bank of England, Chris Arcari, Head of Capital Markets, Hymans Robertson:

“Today’s rate rise was more than expected and market expectations are for rates to peak at around 6% p.a. early next year, before falling back but remaining higher for longer, with the market also suggesting rates will stay above 4% p.a. for the next 4 years. Much of this expected tightening is already being reflected in mortgage rates, which will begin to bite harder as more and more homeowners roll off their fixed rate periods over the next few years.

“The latest run of upside inflation surprises has seen interest rate expectations rise significantly and has caused further indigestion in the gilt market, which has been vulnerable to disappointing inflation data amid BoE gilt sales (quantitative tightening) and heavy issuance to fund a large government deficit.

“One can imagine a benign way for goods inflation to fall, such as an easing in supply chains, falling commodity prices and re-orientation of demand from goods to services. However, labour-intensive service sector inflation does call for further action from the Bank of England, as it is a gauge of the domestic-driven inflation pressure the Bank can do something about. The Bank needs to tighten monetary policy to slow economic activity to the extent that demand for labour is reduced, and hence labour market tightness and wage pressures ease.”

Commenting on today’s interest rate rise from the Bank of England, William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS) says:

"The Bank of England’s (BoE) rate rise today reflects the fact that inflation now looks to be driven by domestic price pressures – largely stemming from the constricted labour market. Latest data shows salaries (excluding bonuses) rose by 7.2% across the economy, a level inconsistent with the BoE achieving its 2% inflation target. From yesterday’s inflation data, the BoE will also be concerned by the fact that core inflation (which excludes volatile items like food and energy) continued to rise, reaching a 30-year high of 7.1%. In contrast to the price shocks experienced last year which came from external sources, all the above adds to the evidence that the UK is entering a wage-price spiral.

"When compared to other economies, the UK is starting to look like an outlier, as inflation is decreasing at a faster rate in the US and euro-zone countries. Consequently, expectations of interest rates surpassing those of the Federal Reserve have increased. As a result, yields on UK government bonds have risen accordingly – UK gilt yields are now almost 0.7% higher than equivalent US Treasury bonds. However, sterling has also been strengthening over the last month as the prospect of higher interest rates and bond yields attracts international investors. Although the market’s expectations of interest rates reaching 6% might be overdone, unless the data improves significantly, it looks likely that there will be additional rate hikes in the coming months. With the level of returns available on holding cash rising, advisers may start to get questions from clients on whether now is the best time to invest. But for advisers, maintaining a long-term view is king, as history shows cash generally underperforms other asset classes over the long run."