Asset managers facing reality of interest rate hikes

Christopher Marchant, 04/02/2022

Asset managers have reacted to the Bank of England’s (BoE) decision to raise the interest rate to 0.5 percent, the first consecutive rise in interest rates since 2004 and a contrast to the continued doveish outlook of the European Central Bank (ECB).

The Bank’s Monetary Policy Committee (MPC) also estimated that consumer inflation will peak at just over 7% in 2022, even allowing for the intervention announced by the Government to hold down rises in energy bills. It downgraded its forecast for the UK’s GDP growth this year to 3.75% from 5% previously.

As a bonds-focused firm, US-based asset managers Pimco would stand to lose out in a period of sustained interest hikes set by national banks.

Peder Beck-Friis, Portfolio Manager at Pimco, said: “The BoE hikes its policy rate and sends a strong signal that more is coming. But their inflation forecast — well below target in three years — also suggests that they do not intend to hike by that much.

“We now expect more front-loaded interest rate hikes, one in March and another one in May. The policy outlook thereafter is unusually uncertain and will largely depend on inflation and wage developments. With ongoing macro uncertainty and volatility, every meeting is live for a possible rate hike.”

There was division within the Bank of England, as the BoE’s Monetary Policy Committee (MPC) voted by five to four in favour of increasing rates from 0.25 percent to 0.5 percent. The other four members wanted to increase rates further to 0.75 percent.

Meanwhile, a meeting of the European Central Bank left its interest rate at 0 percent, but also left open the possibility of two interest rate hikes in 2022.

Of the ECB meeting, Andreas Billmeier, European economist at Western Asset, now part of Franklin Templeton since its acquisition of multi-boutique Legg Mason, said: “ECB President Lagarde seemed clearly nervous about how the inflation surprises in December and January will feed into the medium-term outlook. She stressed the near-term risks to the upside for the ECB’s inflation forecast, but referred to the fuller assessment in March for a view on the medium term.

 “We believe that the ECB is slowly changing its tune from having to ‘see’ significant wages increases to justify rate hikes to being able to ‘foresee’ those wage increases based on the general context, including a tight labour market environment and inflation expectations.”

UK inflation hit a 30 year high in December, finishing 2021 at 5.4 percent. Europe is seeing less inflation pressures than in the US, with core inflation over 3 percent, below the 5.5 percent US level.

Ben Laidler, global markets strategist at multi-asset investment platform eToro, said: "The European Central Bank (ECB) is lagging the global march to raise interest rates, led by the Bank of England and the US Federal Reserve. But its meeting today saw ECB President Lagarde recognise the upside risks to inflation, and begin to open the door to a potential rate hike later in the year. 

"All this while other key economies like Germany and Spain have not yet recovered from the pandemic, given their auto and tourism sector headwinds.”

As well as raising its base rate to 0.5 percent, the BoE has also stopped re-investment of gilts for its quantitative easing programme and will sell down the £20 billion corporate bond programme by end of 2023.

Of the more hawkish moves made by the Bank of England, James Lynch, fixed income investment manager at Aegon Asset Management, said: “Short term, the MPC is not happy with the inflation picture. It sees 7.25 percent inflation for this April, and it thinks the UK has a tight labour market and a small amount of excess demand in the economy.

 “But it thinks this is down to energy prices, something it is at pains to tell us it can do nothing about. In the medium term, once again by magic inflation goes back to target and we have excess supply in the economy. However, four members voted to raise rates by 50bps. It sounds like those four are bit more worried.”

The pound sterling has rallied against the USD on the back of the BoE’s decision, as time of writing breaking the $1.36 ‘resistance level’, according to Jesús Cabra Guisasola, senior associate at Validus Risk Management, a sign of the currency’s stronger performance in the year to come.

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