Bank of England raises interest rates to 1.25%

In its meeting on June 16, the Monetary Policy Committee voted 6-3 to raise the rate by 0.25 percentage points. The three dissenters voted to raise the rate by 0.5 percentage points.

In the meeting’s minutes, the MPC said that though there has been “little news” in global and domestic economic data since the May report, there have been “significant” movements in financial markets.

The committee highlighted the weaker-than-expected level of gross domestic product growth in April, and it now expects that measure to fall by 0.3 per cent in the second quarter as a whole.

It said that although consumer confidence has fallen further, other indicators of household spending appear to have held up.

The labour market continues to be tight — with unemployment at 3.8 per cent in April — with elevated recruitment difficulties and strong labour demands, the report stated. 

Consumer price index inflation is expected to be more than 9 per cent during the next few months and to rise to slightly above 11 per cent in October.

The MPC said initial analysis of the recent cost of living support package suggests that it could boost GDP by 0.3 per cent and raise inflation by 0.1 percentage points.

This hike in the interest rate, combined with the 0.75 per cent rise announced by the Federal Reserve this week, has prompted gilt yields to continue to rise further, with yields now more than 1.5 per cent a year higher than at the beginning of 2022, noted Marc Devereux, head of investment consulting at Broadstone.

“The impact of substantially higher yields will mean a material reduction in the value of most defined benefit schemes’ liabilities,” he said

However, Devereux stressed that the overall impact on funding positions and investment arrangements “could be very different depending on a scheme’s particular investment exposures and levels of liability hedging in place”. 

“For example, some schemes with limited amounts of liability hedging may have seen a significant improvement to their funding position, while well-hedged schemes may have seen modest changes depending on how their other assets have performed,” he added.

Ross Fleming, Hymans Robertson’s co-head of DB investment, shared this opinion, adding that the rate increase could also have an impact on “schemes’ collateral positions, backing any interest rate protection currently in place”. 

“We would therefore urge DB pensions scheme trustees to consider whether this interest rate movement is an opportunity to both take further steps towards shoring up the funding position, as well as checking the impact on their scheme liquidity,” Fleming said.

This article first appeared on FTAdviser.com