Bank of England increase interest rates by 0.5%

Bank of England increase interest rates by 0.5%

22 Jun 2023

Following the news yesterday that 12-month inflation had not reduced from the previous month’s figure, it became apparent that the Bank of England would likely decide to raise rates by more than the anticipated 0.25%. This is on the basis that market expectations were revised upwards to 6% by the end of the year, which was more than could be delivered with a 0.25% rise at each remaining announcement.

A 0.5% increase adds upwards pressure on short term bond yields, although the effect on longer terms yields is likely to be more muted. Earlier this month 2 year gilts yields exceeded the highs of the gilts crisis.

Simeon Willis, CIO at XPS Pensions Group commented: “In general higher yields are having a beneficial impact on pension scheme funding levels, due to falling liability values. Longer term inflation expectations have been relatively stable in recent weeks so pension schemes and sponsors are generally benefitting from current conditions, but this should not be confused with a good news story. Better funding levels usually equate to more secure pensions for members. However, in this instance the benefit of rising rates has come, to some extent, at a direct cost to members, whose benefits have lost real purchasing power. Some schemes may consider discretionary awards to compensate members, but many are not in sufficiently strong financial positions to consider this. The rise in interest rates that pension schemes have waited over a decade for, has turned out in many respects to be as dismaying as the low interest rate environment that preceded it.”