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

“Inflation in the UK has taken longer to fall from its peak than in other economies such as the US and euro-zone, having only fallen by 1.0% since the peak in October 2022. Although some of this is due to one-off factors such as higher energy and food prices in the region, the fact that core inflation, which excludes these, remained flat at 6.2% in March made it easy for the Bank of England to justify another 0.25% interest rate hike.

“The latest forecasts from the BoE show another upgrade to growth for this year, bringing it more in line with the ONS’s forecast. This mostly reflects lower gas prices. However, their inflation forecast for this year has gone also risen. This is due to recent data showing wage growth remaining high at 6.6%, indicating that the labour market remains tight enough for the Bank of England to contemplate additional rate hikes in the coming months.

“The initial market reaction to the interest rate move was limited as it had already been priced in by investors. Although investors would have taken some comfort from the upgrade to the growth forecast this has been offset by the BoE’s view on inflation. Although the market reaction today has been muted, it is important for advisors to be cognisant that we still expect bond market volatility to remain high in the coming months especially around inflation data releases.”

Commenting on today’s 0.25% interest rate rise from the Bank of England, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“Amidst recent upside surprises in growth and inflation, the Bank of England will feel vindicated in raising rates a further 0.25% p.a., to 4.5% p.a., today.

“UK headline inflation fell from 10.5% to 10.1% year on year in March. It was helped by a slight deflationary impulse from fuel, but the UK won’t see the first step down in broader energy inflation until the April inflation print that is released in May. Core inflation, which had been expected to fall, instead remained flat at 6.2% year on year. This, combined with a hot wage print that saw average weekly earnings increase by 6.6% year on year made today’s rate hike more likely and will add to speculation that further hikes will be required.

“Not only have recent growth and inflation releases surprised to the upside, but April’s purchasing managers indices suggest growth accelerated once more in April. While there remains divergence between surging demand in the services sector and ongoing downturn in the manufacturing sector, the recent upturn in demand has been accompanied by a rekindling of price pressures. Manufacturing prices continued to decline as supply chains improved, but prices in the services sector are showing no sign of abating, with tight labour markets contributing to rising input and output costs. Given the service sector is a far more labour-intensive sector, services prices play a particularly significant role in the core inflation rate upon which central banks are focussing on.

“While headline inflation is expected to fall reasonably sharply due to falls in energy and other commodity prices, continuing pressures on core inflation means there is far more uncertainty around the extent of the potential fall in inflation and where it will settle.”