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Columbia Threadneedle Investments comments on the Bank of England’s interest rate rise

The Bank today reversed the interest rate cut that they made in August last year, increasing rates for the first time in ten years to 0.5%. The impact of this hike on households looks to be minor in the context of a variety of fiscal changes that are in train.

The market had almost fully discounted the increase in interest rates that the Bank of England voted 7-2 to make. This would typically mean that there would be little reaction. However, the immediate market reaction has been for the pound to fall by over 1% against all major currencies and for UK bond yields to fall sharply. UK stocks rallied but this looks to reflect almost entirely the currency move: they underperformed overseas equities in common currency terms. The reason for this reaction was that the Bank dropped the line from its statement that rates may need to rise more than the market expects, and this was interpreted by the market as removing some risk that this was the first of many rises to come.

The Bank furthermore judged that despite lacklustre economic growth, the UK has been growing above its speed limit, sending a grim message to the market around its expectation for potential UK economic growth.

Toby Nangle - Head of Multi-Asset, EMEA - Columbia Threadneedle Investments