The Bank of England (BoE), as analysts expected, raised interest rates again to 0.5% on Thursday afternoon, which is the first back-to-back UK hike since 2004.
The Bank's Monetary Policy Committee said in a statement that at its meeting on 2 February 2022, the MPC voted by a majority of 5-4 to increase Bank Rate by 0.25 percentage points.
"Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 0.75%," the BoE said.
Many market commentators are hawkish on the matter, predicting that rates will reach 1.25% by the end of this year with four rate hikes and possibly even a sequence of four monthly rises one after another not ruled out.
With the Bank Rate reaching 0.5%, the MPC confirmed that the corporate bond-buying programme will stop.
"The Committee agrees that the BoE should cease to reinvest any maturities falling due from its stock of sterling non-financial investment-grade corporate bond purchases and that it should initiate a programme of corporate bond sales to be completed no earlier than towards the end of 2023 that should unwind fully the stock of corporate bond purchases," the BoE added.
This would see the end of roughly £28bn of monetary stimulus with a further £9bn dropped over the remainder of the year.
Deutsche Bank's economists also anticipate a further 25 basis points (0.25%) hike in interest rates in August, followed by hikes in February 2023 and August 2023, taking the Bank Rate up to 1.25%.
Of course, this is speculation, and the BoE has wrong-footed markets before, especially as inflation is the concern and this might yet ease, according to the EY Item Club’s Martin Beck.
"The extent of any further tightening in monetary policy will depend on the medium-term prospects for inflation.
"The MPC judges that, if the economy develops broadly in line with the February report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months," the BoE added.
With Ofgem having confirmed a 50% rise in the energy price cap on Thursday it will boost household bills to approximately £2000 per year from April.
National insurance (NI) tax will also shoot up 1.25 percentage points from the new financial year in April.
So, homeowners are set to face a triple financial whammy, with the interest rate climb raising mortgage payments, NI hike reducing real wages, and surging energy bills all set to squeeze budgets higher than ever.
“April [is] set to be [the] cruellest month in decades,” Interactive Investor commented.
What do rising interest rates mean for markets and investors?
Laith Khalaf, head of investments at AJ Bell, said higher interest rates will have a widespread impact on the UK economy.
Share prices
Equities are likely to take a big hit, despite the hike highlighting the economy is in better stead.
“The worst-case scenario for equity markets is stagflation, where interest rates rise simply to fend off inflation, but the underlying economy is going sideways, making it harder for companies to grow their sales,” Khalaf said.
Although, equities are probably better than bonds in a quantitative tightening cycle and will offer protection from inflation in the long term.
Indebted companies
Companies that are in debt will have to pay back larger sums of interest on their borrowings, so those with the largest debt piles will see bigger reductions in their earnings following repayments.
Tech and growth stocks
Technology stocks lose value when interest rates rise because they are ‘growth’ stocks, which means they give high returns in the distant future and higher rates squeezing consumer spending power puts a question mark about growth assumptions.
“We have already seen this in the US tech sector with a large sell-off in the last month as expectations of tighter monetary policy rose.”
Banking sector
Interest rate hikes are generally good news for banks.
“The ultra-low interest rate environment has compressed the interest margin between deposits and loans, which are a bedrock of profits for commercial banks,” Khalaf added.
Banks will now earn higher interest on money they lend out, though their cost of borrowing (ie savings accounts/money markets) will rise, while bad loans shouldn’t tick up too much as 0.25% rate changes are minuscule and gradual.
Corporate bonds
Corporate bonds carry a higher rate of interest rate usually linked to a bank rate, so debt becomes more expensive, which affects earnings.
Residential property
This is where the big impact on households will be felt, especially coming at a time of soaring energy prices.
An increase in rates will push mortgage rates higher and might take some heat out of the housing market, which surged in 2021.
“Prices could fall, but a moderation of price growth seems more likely, given the ongoing imbalance between supply and demand, and the presence of continued government support in the form of Help to Buy and the Mortgage Guarantee scheme,” Khalaf believes.
Gold
Gold pays no income, so its attractiveness against bonds for example lessens when interest rates rise.
The metal traditionally has enjoyed an inverse relationship with US Treasury bond yields.
When rates were near zero, as they have been for much of the pandemic, the opportunity cost of holding gold with no return is practically nothing.
“As interest rates rise, that cost becomes heavier to bear, and cash and bonds become more attractive as havens,” Khalaf explained, though gold still has appeal as a hedge against inflation fiat currencies lose value.