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Bank of England: keep rates up and sit tight

3 min read

Ben Kumar, Head of Equity Strategy, Ahmer Tirmizi, Head of Fixed Income Strategy02 Nov 2023

The Bank of England (BoE) has decided to keep the base rate where it is. For the second straight meeting, rates remain at 5.25%.

This decision is not too surprising - the Bank has pretty much said as much in recent public statements. The September decision by the Monetary Policy Committee (MPC) gave indications that it was encouraged by the continued decline in inflation and wage pressures, deciding against another hike. It turns out the previous 14 consecutive hikes might be enough.

Since then, we have seen more geopolitical turmoil in the Middle East which could have threatened to bring back inflation concerns. However, the UK’s ongoing housing market weakening and slowing growth seem to have taken precedence.

Additionally, the most recent wage indicators have softened too, which suggests the effects of previous rate rises might already be doing the job. Keeping rates high will eventually slow down the economy by increasing the cost of borrowing.

This rise in cash rates has led to the returns on all investments going up. This is a compelling reason why we’re living in a (more) golden age for investors. Our Deputy CIO Matt Yeates explains this topic in depth in this article.

What does the Bank’s latest decision mean for 7IM?

This decision from the Bank to keep the base rate flat is not a surprise, and it doesn’t affect our portfolios.

As mentioned, we’ve been undergoing a period of sluggish growth and our portfolios are prepared to grow in this type of environment.

We hold foreign currency, and this currency diversification protects us against any Sterling currency shocks
Our UK equity exposures are relatively small, and therefore, our portfolios can easily absorb any UK-specific fluctuations
Our fixed income holdings are also properly diversified and not UK-concentrated.

Transcript

In non-news today, the Bank of England has done absolutely nothing. I'm being a bit flippant, of course, they’ve spent two years doing quite a lot, as we've all noticed. But we're getting to the point where people are now saying, “Oh, well, if the Bank of England's done nothing, the next thing they're going to do is cut rates.” And I just don't think that's the right way to think because the Bank of England, the Monetary Policy Committee, are more like weather forecasters than people realise.

They have a lot of models that they use to make sense of a lot of complex data, and then they apply their experience. In the case of the weather forecasters, it’s to suggest that storm Ciarán might be a bit dangerous if you're in low-lying areas and that winds are going to get quite strong. In the Bank of England's case, they're trying to make sense of a lot of economic data, and of course, of the impact of them raising interest rates so much over the last couple of years, and they're giving their models and their brains time to work out what to do next.

So suggesting that there's a definite action that they're waiting to take, is the wrong way to think about it. They’re waiting to update their forecast models and then will take a decision after that.