The Bank of England has increased its benchmark interest rate by 0.75 per cent to 3 per cent – the largest rate hike in 30 years.
Hymans Robertson co-head of DB Investment Elaine Torry says: “For pension schemes, an increase in short dated base rates in isolation should not be too much cause for concern. However, the rationale for the increase, coupled with other upcoming fiscal announcements could cause a ripple effect up the yield curve.
“If this happens, the rate rise could be a contributory factor to certain schemes being faced with fielding a further round of collateral calls, whilst others may find themselves in the position to be able to afford to de-risk and lock in funding level gains. However, the challenge that is overshadowing many schemes at the moment is the overarching balancing act that is having to be performed between managing risk and sticking to strategy versus the practicalities of raising cash to field collateral calls within the required timescales.
“With November’s autumn statement a fortnight away uncertainty remains for many. DB Trustees must evaluate whether this interest rate hike, and subsequent knock-on effects, present an ironic opportunity to take advantage of improvements in funding positions or whether running to stand still will continue to dominate time and attention.”
XPS Pensions Group senior consultant Charlotte Jones says: “Analysis by XPS’s DB:UK funding tracker shows that the average UK pension schemes are now in surplus, with the improvement in funding positions largely attributable to rising gilt yields and the repeated lifting of interest rates by the Bank of England. In spite of recent market turmoil, since the first interest rates rise in December 2021 approximately £800bn has been wiped off the value of UK DB pension scheme liabilities, which equates to a 35% drop in their value.
“However, the full impact of the market turmoil following the mini-budget is not yet known, and some schemes that were forced to reduce their hedging before gilt yields dropped in the latter half of October may yet find themselves worse off or even pushed back into a deficit.”
Aviva Investors head of rates Edward Hutchings says: “The Bank of England duly delivered on financial markets expectations of a 0.75 per cent hike. This will most likely mark the peak in pace of tightening, especially with the Bank highlighting financial markets are pricing too much too soon. Next up for the UK will see the focus shift to the Autumn Statement to see what the Chancellor’s fiscal plans are, but in the meantime, the headlines point to Gilts being relatively more supported, however the currency less so.”
IG Group senior market analyst Josh Mahony says: “Today’s 75-basis point hike from the Bank of England represents the most dramatic tightening move from the Bank since 1989, with seven of the nine members all agreeing that the pace of tightening should be ramped up in the face of double-digit inflation. While the Bank of England’s decision to hike by such a degree was widely expected, it represents a notable step change from the slowing pace seen in Australia and Canada.
“The FOMC warning that rates will likely have to rise further than previously expected does provide similar expectations for the UK, with European central banks faced with the fear that a looser approach compared with the Fed will bring further FX weakness and thus higher imported inflation. Unfortunately, today’s decision brings expectations of tougher times ahead for the UK economy, with a new frugal approach from the government meaning that we are likely to see a 2023 that will prove tough for both consumers and businesses alike.”
LV= chief investment officer Adam Ruddle says: “The Bank of England’s decision to raise interest rates by 0.75 per cent is in line with our expectations. The Bank has been clear that managing inflation down is their key responsibility – even if that means subdued economic growth. While an increased rate helps tackle inflation it hinders economic growth. The Bank’s views on inflation have fallen as a result of the Energy Price Capping initiatives but risks have increased that inflation may remain entrenched for longer than previously expected. This likely means that interest rates will continue to rise and remain at higher levels for longer. We anticipate that interest rates will continue to rise and may reach 3.75 per cent by the end of 2023.”
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