Threadneedle first thoughts on UK interest rates rise

The Bank of England’s Monetary Policy Committee raised interest rates to 5.25% today, marking the third hike in the UK cost of borrowing since last August.

The move came sooner than expected – many commentators were forecasting further tightening but most did not expect any change this month. There is speculation that the MPC has seen the inflation data that is due for publication next week, but what seems more likely is that the Committee is acting prudently to contain potential inflationary pressures arising from the current round of pay settlements. Threadneedle continues to expect UK rates to be falling by the year-end.

“We had acknowledged the risks of further tightening early in 2007 but believe that lower rates before the end of the year remains plausible,” says Quentin Fitzsimmons, Head of Government Bonds at Threadneedle. “In fact, by putting earlier pressure on the consumer, this may accelerate the end of the current cycle of interest rate increases”.

The bond market’s reaction to the move was predictable, with short-dated bonds selling off.

“Short-dated gilt yields reacted badly to the news, but longer-dated issues held in well,” commented Fitzsimmons. “We expect the curve to invert further and our portfolios are positioned accordingly. Sterling has also firmed against the euro, and the dollar, which is further good news for our portfolios.”