FTA Vantage Point: Interest Rates  

'Don't do anything': Experts shrug off impact of base rate rise

'Don't do anything': Experts shrug off impact of base rate rise
  Bank of England governor Andrew Bailey

Today's new interest rate had already been priced in and was unlikely to rise any further than 1.5 per cent in the near future, experts have said, as they shrugged off the impact of the Bank's latest move. 

“No western economy could take that level of interest rate now because of the amount of debt that is in the system,” Ben Yearsley, investment consultant at Fairview Investing, told FTAdviser.

“What will they top out at? 1.5 per cent probably,” he added.

“I still think [central banks are] hoping that all these base effects start falling out of the system and that inflation is temporary, which I still think it probably is, but it is a mighty big spike.”

The Bank of England’s monetary policy committee voted today (February 3) to raise the base rate of interest to 0.5 per cent.

The hike comes after inflation has rocketed in recent months, hitting a 30-year high of 5.4 per cent in December.

The MPC voted 5-4 to raise rates by 0.25 percentage points, with the four dissenting members voting instead for a sharper increase in rates, to 0.75 per cent, signalling more hikes to come. 

The bank expects inflation to increase to 6 per cent in February and March, and to a high of 7.14 per cent in April, but it added it expects it to "dissipate over time", and drop back to its 2 per cent target within two years.

Georgina Taylor, multi-asset fund manager at Invesco, said the dilemma for the bank was to balance taming inflation with protecting UK households from a severe income squeeze.

“The implication of this policy manoeuvre is that they may have to stop hiking very quickly or risk a policy mistake by putting the brakes on the economy too fast and too quickly.”

Darius McDermott, managing director of Chelsea Financial Services, pointed out the base rate was still at a relatively low level. 

“Interest rates are likely to remain significantly below their long term average even after these rises and while inflation may well rise further in the short term, I think it will start to ebb in the second half of this year," he said. 

No portfolio changes needed

Yearsley said his advice to wealth managers would be not to change anything in their portfolios.

“Don't do anything. As long as you’ve got a balanced portfolio, why do you need to do anything?” he said.

Growth was “clearly” very painful at the moment, he added, but the flip side was a spectacular performance by value stocks.

That's the point of having a portfolio he said, you don't have everything pointing the same way.

McDermott said today's rate rise was already very much priced in by the markets, and that it was now sensible to favour equities over bonds and value over growth.

“Funds with assets that have pricing power or that are linked to inflation will probably fair better," he said.

Pension implications

Ben Seager-Scott, head of multi-asset funds at Tilney, said the rate hike shouldn’t have a huge impact on investors looking to retire soon.