Does the Bank of England know something the market doesn’t?

Today’s surprise increase in UK interest rates has left Bambos Hambi and Marcus Brookes, co-heads of Gartmore’s MultiManager funds, wondering if the Bank of England knows something the rest of the market doesn’t.

“The market has been caught off-guard by today’s decision, but it is only the timing rather than the actual increase which was unexpected”, says Bambos Hambi. “With the quarterly inflation report due next month, it was widely anticipated that interest rates would reach 5.25% in February, as increases in the current tightening cycle have often come in a month when this data was released. Our key concern now is whether this is a pre-emptive measure or if the Monetary Policy Committee (MPC) will opt for a further hike in the coming months.

“Until the minutes of the meeting are released in two weeks time, we are left speculating about what prompted this move. It could well be that the economy is growing faster than had been predicted and that there are concerns about the lack of spare capacity. Equally, an unexpected drop in unemployment could be cited as increasing inflationary pressures. Retail price inflation, which is often used in wage negotiations, has been higher than consumer price inflation so we were already expecting comments about the demand for higher wages. The decision to increase rates sooner rather than later may well be a move aimed at pre-empting above-inflation wage increases as salaries are renegotiated throughout the first quarter.

“The short-term impact is that sterling has strengthened against the euro and the dollar. Looking at equities, stocks including home-builders and leisure groups such as pubs will feel the effect. In the medium-term, this move has the potential to spook the housing market, which has so far remained fairly buoyant in the face of higher interest rates. It will also intensify concerns about the high level of consumer borrowing. At this stage, today’s increase in rates doesn’t alter our fundamentally positive outlook for UK equities. However, this could change once we see the minutes from this week’s MPC meeting.”