Thursday's decision

The Bank of England’s Monetary Policy Committee (MPC) has voted to increase its Official Bank Rate to 1.00% - their highest rate since 2009. The Bank’s move represented its fourth consecutive rate hike since December – the fastest increase in borrowing costs in 25 years.

The decision means the Bank joins other central banks including the US (+0.50%), Australia (+0.25%), Brazil (+1.00%), Chile (+1.25%) Czechia (+0.25%), Iceland (+1.00%), India (+0.40%) and Poland (+0.75%) in a global push to tackle rising prices.

There had been speculation before the meeting that one or two MPC members might opt for a 0.50% increase, the vote was in fact split 6:3 to raise the Bank Rate by 0.25% with three dissenters, Catherine Mann, Michael Saunders and Jonathan Haskell preferring a larger rise. This represented a change in the dynamic from the previous meeting, when eight members voted for a 0.25% increase, and one opted for no change.

The MPC doubled down on its March narrative, setting out the potential for a marked slowdown in activity over the coming months and sharply cutting its growth forecasts, as the negative impacts from the higher cost of living weighs on household real incomes.

A 0.25% increase was widely expected, with markets implying approximately a 15% chance of a 0.50% increase. Following the announcement, and the more pessimistic comments from the MPC, market expectations for the path of Bank Rate shifted lower. Investors now see rates peaking at around 2.50% in the middle of next year, down from 2.60% before the announcement.

 

Source: CCLA/Bloomberg.

Despite the rate increase, the Pound fell to its lowest level since June 2020 following the decision and statement, as concerns grew surrounding the growth forecasts and perceived indecision risk within the MPC. Sterling fell just under 1.5% against the dollar to below $1.24.

Rationale behind the increase

The MPC is clearly struggling to navigate a balancing act between runaway inflation and tipping the economy into recession, as a result we have a divided committee and confused messaging. The MPC repeated a form of the guidance it issued in March, when it said ‘some further modest tightening in monetary policy may be appropriate in the coming months.’ However, at this meeting, the minutes highlight a split amongst policymakers with ‘most’ members agreeing to the guidance. The word ‘modest’ was also switched to ‘some degree’, which may indicate that at least one member now thinks interest rates need to rise substantially further.

Confusingly, two members of the Committee judged that the risks around activity and inflation over the policy horizon were ‘more evenly balanced.’ As a result, it seems likely that these two members could vote to keep Bank Rate at 1.00% at the next meeting on 16th June.

The Bank yet again revised up its inflation forecasts and now expects CPI inflation to rise further over the remainder of the year, to just over 9% in Q2 2022 and averaging slightly over 10% at its peak in Q4 2022. The majority of the further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and a projected additional large increase in October. The expected rise also reflects higher food, core goods and services prices.

Again, the Bank has tried to highlight that it is unable to contain many of the causes of this high level of input inflation:

‘The economy has recently been subject to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock. In particular, should recent movements prove persistent as the central projections assume, the very elevated levels of global energy and tradable goods prices, of which the United Kingdom is a net importer, will necessarily weigh further on most UK households’ real incomes and many UK companies’ profit margins. This is something monetary policy is unable to prevent.’

At the press conference following the decision, Bank Governor, Andrew Bailey kept a similar narrative to that expressed in his recent speeches. Explaining the rate announcement, he said the Bank is walking a very narrow path, citing the spending of savings built up during the pandemic and the tightness of the labour market as potential contributors which could allow for some second-round inflation:

‘The Underlying nominal earnings growth has risen by more than projected in the February Report and is expected to strengthen in coming months, given the further tightening of the labour market and some upward pressure from higher price inflation.’

Given that the Bank is clear that rate rises will have limited effects on input inflation, we continue to view the strength of the labour market as the main justification for the recent rate hikes, as the Bank looks to head off second round inflation effects such as rapid pay growth. However, even this shining light of the post covid recovery appears under threat with the Bank projecting (albeit after a further near-term reduction) a c.1.5% rise in unemployment in three years’ time, which may ease some of the wage pressures that have built here.

The risk of stagflation

The Bank stressed that the surge in energy and goods prices will have a material impact on the UK economy:

‘UK GDP growth was expected to slow sharply over the first half of the forecast period. That predominantly reflected the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins.

Total real household disposable income was projected to fall by 1¾% in 2022, which was a greater fall than in the February projection. Four-quarter consumption growth was expected to slow materially over the first half of the forecast period.’

The Bank kept its forecast for economic growth this year at 3.75%; but cut its forecast for 2023 to show a contraction of 0.25% from a previous estimate of 1.25% growth. It cut its projection for 2024 to 0.25% growth from a previous 1.0%.

It therefore appears that, with inflation projected to be in double digits as we move towards the end of the year and with growth flatlining, we do appear to be approaching a period of stagflation and the future performance of the economy is increasingly looking linked to how much support for households the Chancellor may inject into the economy.

Quantitative tightening

With Bank Rate now at 1%, the MPC has triggered its self-imposed threshold at which it would ‘consider’ the active sales of gilts held in its Asset Purchase Facility. Unlike the US Federal Reserve decision to commence selling its stock-pile last week, the MPC has only asked the Bank of England staff to work on a strategy for sales. Their work will be presented to the MPC at the August meeting, for discussion.

Future path for Bank Rate

We maintain our view that the MPC will now pause its rate hiking cycle while it assesses the momentum within the economy, particularly in light of the dour economic growth projections. With MPC guidance divided, confidence in our assessment is low, with the Bank themselves pointing out ‘there are risks on both sides of that judgement.’ Therefore, the chances of a fifth consecutive rate increase in June do look finely balanced and another hike should not be ruled out.

Despite the latest economic projections from the Bank, the market-implied interest rate path now shows rates rising to 2.37% within the next twelve months, compared with 2.00% in March, which we continue to view as overly optimistic.

 

 

Source: CCLA/Bloomberg.

 

Impact on deposit funds

Since the start of the year, we have been positioning the investments within our three cash funds to allow for their net yields to quickly react to this new rate environment. Using CCLA’s Public Sector Deposit Fund as an example, within the next seven days 45% of the holdings will have been rolled over at the new higher rates, 54% within a month and 86% in less than three months. Therefore, we should see a relatively quick readjustment in their net yields.

Given the volatility we have witnessed over recent months at the longer end of the curve, we have been reluctant to overextend the funds into these periods, thereby protecting mark to market values in the process.

The CBF Deposit Fund declared rate will increase on Tuesday to 0.80%, by close of business Friday we expect the PSDF net yield to be around the 0.82% level, while the COIF Charities Deposit Fund should be around the 0.72% mark, and we expect a continued upward trend in these yields over the coming weeks and months.  [SS1] 


 [SS1]This will be removed for general use hence the generic disclaimer. However, if this is used in relation to the funds, then the appropriate disclaimer will be added.

 

Important information

This document is issued for information purposes only. It does not constitute the provision of financial, investment or other professional advice. Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may fall as well as rise. Investors may not get back the amount originally invested and may lose money. Any forward-looking statements are based upon CCLA's current opinions, expectations and projections. Such opinions, expectations or projections may be subject to change at any time. CCLA undertakes no obligations to update or revise these. Actual results could differ materially from those anticipated.

 

Terms and conditions

Website terms of use policy

CCLA Website Terms of Use

Welcome to CCLA's website for:

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This page provides you with information about CCLA and the legal terms and conditions (Terms of Use or Terms) on which you can access and use this website.

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1. About us (CCLA)

1.1 Any reference to CCLA or we/us on this website (including these Terms of Use) means CCLA Investment Management Limited and/or CCLA Fund Managers Limited (as applicable).

1.2 CCLA Investment Management Limited (CCLA IM) is a company registered in England and Wales with company number 2183088. It is authorised and regulated by the Financial Conduct Authority under the Financial Services and Markets Act 2000 (FSMA), and is entered on the Financial Services Register under registration number 119281.

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1.4  The registered office of CCLA IM and CCLA FM is Senator House, 85 Queen Victoria Street, London, EC4V 4ET.You may also contact CCLA by emailing clientservices@ccla.co.uk.

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2.1 The information on this website is intended for investors and prospective investors in the CCLA Funds and or clients or prospective clients of CCLA's services. Only certain types of investor are eligible to invest in the CCLA Funds (in summary these are charities and local authorities and certain of the CCLA Funds are restricted to particular types of these investors).

  • Charities for these purposes are charities or charitable organisations registered with the Charity Commission of England and Wales, or charities exempt from registration, or other persons eligible to participate in collective investment schemes constituted under the Church Funds Investment Measure 1958, section 24 of the Charities Act 1993 (now amended to section 96 of the Charities Act 2011), or section 25 of the Charities Act 1993 (now amended to 100 of the Charities Act 2011), or equivalent organisations in Scotland or Northern Ireland.
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8.1  All complaints will be handled in accordance with CCLA’s Complaints Policy  which can be found at https://www.ccla.co.uk/helpful-links/ccla-complaints-policy.

 If either CCLA IM or CCLA FM cannot meet its obligations (for example, where it has stopped trading and there are insufficient assets to meet its obligations), investors may be eligible to claim compensation up to a maximum of £85,000 from the Financial Services Compensation Scheme. There are limits on who is eligible to claim and which funds are covered. For further information about the Financial Services Compensation Scheme please refer to www.fscs.org.uk or phone 0800 678 1100.

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9.7 Full details of CCLA’s Privacy Notice is available on CCLA’s website. Full details of CCLA’s Data Protection Policy, are available on request.

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 Your telephone calls and electronic communications with CCLA may be recorded. You agree that CCLA may deliver copies or transcripts of such recording to any court or competent regulatory authority.  Such records of conversation and/or communications with you will be available on request for a period of five years (or, where requested by the FCA, for a period of up to seven years) from the date when a record is made.

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18 August 2021             

 

 

 

Public sector funds

Public sector funds

The Local Authorities Property Fund (“LAPF” or “the fund”) is an unregulated collective investment scheme. As such, only persons who have been assessed as elective professional clients by CCLA in respect of the fund (or are already investors in the fund) are able to access details of the fund on this website.

If you have not been assessed as an elective professional client by CCLA or are not an existing investor in the fund, please contact us to discuss this fund:

Client Services

clientservices@ccla.co.uk

0800 022 3505

I confirm that I am a local authority/public sector body as defined in section 23 of the Local Government Act 2003. I also confirm that I have been assessed as an elective professional client by CCLA and/or I am an existing investor in the LAPF.