Bank hike 50bp and all about inflation

Published  22 June 2023
   2 min read

Commenting on The Bank of England (BOE) interest rate rise, Melanie Baker, senior economist at Royal London Asset Management said:

"After strong inflation data earlier this week, a 50bp rate rise shouldn’t have come as that much of a surprise. The Bank isn’t clearly signalling what it is likely to do next, but it has been hiking rates in response to persistent inflation pressures.  Its messaging after this meeting remains the same: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”.  I continue to expect them to raise rates a little further given the continued strength in domestically-driven inflation pressure.

"Although there has rightly been much focus on households experiencing significant financial pain as mortgage rates have risen, so far the economy has proved surprisingly resilient in the face of big cost-of-living shocks and 13 rate hikes. Most strikingly perhaps, the economy continues to generate jobs and by UK standards the unemployment rate remains very low.  Meanwhile, inflation is a problem. Whether looking at headline inflation, core inflation, services inflation or wage inflation, it’s all too high when set against the Bank’s 2% inflation target."

From an investment perspective, Trevor Greetham, Royal London head of multi asset added:

"Base rates are back to the 5% level that was considered normal ahead of the 2008 Global Financial Crisis but they’re still below inflation. (chart 1)

"Higher interest rates are appealing for savers, but cash offers very little protection from inflation over the long run. Keeping your cash on deposit over the 1970s and reinvesting the interest would have seen the value of your savings drop by 27% in real terms. So far since 2008, you’d be down 39% in real terms. (chart 2)

"We’re hopeful that inflation will come down over the next year as lower energy prices feed through and the labour market cools, but the risk of further shocks in this new era of what we’re calling ‘Spikeflation’ suggests a diversified multi asset portfolio including short term inflation hedges like commodities and long term inflation beating assets like stocks and commercial property." (chart 3)

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Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.

RLAM manages £153 billion of assets as at 30 June 2023. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.

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