Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Vantage Point Series
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
    • Investing in Alternatives
    • Risk Management
    • ESG Investing
    • Opportunities in EM
  • Alternatives

    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)

    Equity & Fixed Income

    • PGIM Fixed Income
    • Jennison Associates

    Solutions

    • PGIM DC Solutions
    • PGIM Multi-Asset Solutions
    • PGIM Quantitative Solutions

    Intermediary Distribution

    • PGIM Investments
    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Our Businesses
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
Bank of England
Quick Take

Bank of England doubles down in its battle with inflationBankofEnglanddoublesdowninitsbattlewithinflation

Jun 26, 2023

Five key insights on the BoE interest rate hike

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL

Share

No G7 country currently has higher core inflation than the UK, and the Bank of England’s credibility has taken a hit as a result of its decision making to this point. Many were surprised by its latest hike of 50bp, but the announcement certainly signals that the fight against inflation is stepping up a gear. We asked our leading macro and investment specialists for their views in this quick take.

1. The Monetary Policy Committee is learning lessons from the last few months

The central bank is adopting an attitude that emphasises the severity of the situation. Many have levelled blame at the speed of the Monetary Policy Committee’s decision making, but kinder critics remind us that their task is unenviable; it has been an especially difficult period in which to set policy. Forecasting has become even more difficult than usual, but the MPC has refrained from any language that could indicate that interest rates might be close to their peak. Even without any specific guidance, this decision has certainly set the tone for future meetings, and investors would be wise to prepare for tougher policy ahead.

2. UK recession risk continues to rise

“A faster pace and higher end point for interest rates suggests a hard landing for the UK economy will be difficult to avoid.” Katharine Neiss, Chief European Economist, PGIM Fixed Income

The fact that seven members of the MPC voted for this hike suggests the BoE is questioning its models and leading inflation metrics, which have pointed to improving outcomes for some time. Whilst aggressive rate rises could mean the BoE tames inflation, the subsequent economic damage and policy lags create the risk that not only will they be chasing rates on the way up, they will be chasing them on the way down too. Everything seems ancillary to the task of controlling inflation, with the heightened risk of recession an unpleasant but unavoidable consequence.

3. Risky assets have been resilient…so far

“I would expect risky asset markets to start putting more weight on the negative growth implications of tighter monetary policy. That means downward pressure on GBP, despite higher interest rates, and selling pressure on spread product and equities.” Guillermo Felices, Global Investment Strategist, PGIM Fixed Income

This dynamic is not new to the UK. This was also the case before the mini-budget rout when higher interest rates and growth concerns led to weaker risky assets and notably GBP. It is unlikely to change until we see clearer downward pressure on core inflation in the UK.

4. Market reaction relatively muted, but interest rate volatility isn’t going anywhere 

“The risk of large mark-to-market margin calls could post liquidity challenges for investors.” Dr Michelle Teng, PGIM Institutional Advisory and Solutions Group

Whilst UK DB schemes will see liabilities fall, the recent LDI shock showed that rising rates are not always plain sailing. Many UK pension schemes have been negotiating the challenges of rising rates through tough lessons learned, but a recession (particularly global one) would bring yet more obstacles. The requirement to raise additional cash for risk rebalancing or to meet redemption requirements from nervous investors only highlights the need for a closer look at fund liquidity monitoring and management. In the current landscape, one might ask: ‘Is There a Need for a Chief Liquidity Officer?’

5. Whilst low transaction volume and occupier stress is apparent, real estate opportunities exist both short and long term

“The disconnect between high borrowing costs, capital shortages and downward pressure on values in the near term, and a positive view of the long-term fundamentals for real estate will eventually drive investment opportunities. Our long-term view on pricing is relatively unaffected.” Greg Kane, Head of European Investment Research, PGIM Real Estate

The effects of recent policy rate hikes are greatest in the near term. Transaction volume has been very low for several quarters, and a further rise in borrowing costs is set to exacerbate shortages of available debt and equity capital. Meanwhile, growing risks to the occupier outlook are putting additional downward pressure on values. In the current landscape, it’s important to look for investment opportunities in parts of the market where repricing has progressed significantly and where demand growth is most resilient, driven by supportive structural trends. This includes logistics, data centres and living strategies such as affordable housing, senior living and student accommodation.

CIO Pulse

“Aggressive rate rises increase the risk of a hard landing for the UK economy.  This in turn raises the risk of higher volatility for UK yields and Sterling. Risk protection becomes even more relevant; successful management of portfolios will need strong liquidity management both for defensive reasons and to be able to react to market opportunities.” Cliff Speed, Chief Investment Officer, TPT Retirement Solutions

ACCESS INSIGHTS
WHAT TO EXPECT WHEN EXPECTING A RECESSION

A CIO's guide to interpreting the probability of a recession.

ACCESS INSIGHTS

You may also like

Opportunities in European Real Estate Markets
Real Estate

Opportunities in European Real Estate Markets

May 18, 2023

Andrew Radkiewicz, Managing Director, discusses the collective impacts sustainability and funding are having on European real estate markets.

All The Credit, Ep. 44
Fixed Income

All The Credit, Ep. 44

Oct 12, 2023

With the vast majority of rate hikes behind us, market volatility is set to fall. A tailwind from the reemergence of the “search for yield” is likely to follow.

Looking Beyond the Uncertainty

Looking Beyond the Uncertainty

Jan 19, 2023

With ongoing market volatility a near certainty, PGIM’s Best Ideas highlight a host of areas where we believe investors will find promising opportunities.

  • Insights

    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
  • Investment Themes

    • ESG Investing
    • Investing in Alternatives
    • Investing in Emerging Markets
    • Risk Management
  • Our Businesses

    • PGIM DC Solutions
    • PGIM Fixed Income
    • PGIM Investments
    • PGIM Multi-Asset Solutions
    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)
    • PGIM Quantitative Solutions
    • Jennison Associates
  • Clients

    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
  • About

    • Overview
    • Leadership
    • History
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
  • Careers

    • Careers at PGIM
    • Job Opportunities
  • Newsroom

    • All News
    • Press Releases
    • In The News
    • Facts & Figures
    • Media Contacts
PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures
  • Netherlands Regulatory Disclosures
  • Canadian Regulatory Disclosures
  • Ireland Gender Pay Gap Report
  • Cookie Preference Center

For Professional Investors only.* All investments involve risk, including the possible loss of capital.

This material is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM is the principal asset management business of Prudential Financial, Inc. and a trading name of PGIM, Inc. and its global subsidiaries. PGIM, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not imply a certain level of skill or training.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

In the United Kingdom, this website may be issued by PGIM Private Alternatives (UK) Limited or PGIM Private Capital Limited.  In the European Economic Area (“EEA”), this website may be issued by PGIM Private Capital (Ireland) Limited or PGIM Luxembourg S.A. or PGIM Real Estate Germany AG.

PGIM, Inc. has its headquarters at 655 Broad Street, Newark, NJ 07102. PGIM Private Capital (Ireland) Limited has its registered office at IDA Business Park, Letterkenny, Co. Donegal, F92 FP83, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. PGIM Limited and PGIM Private Alternatives (UK) Limited have their registered offices at Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number: 193418). PGIM Private Alternatives (UK) Limited is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 181389). PGIM Private Capital Limited has its registered address at 1 London Bridge, London SE1 9BG and is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 172071). PGIM Luxembourg S.A., Netherlands Branch is registered with the Netherlands Chamber of Commerce under number 85998877 and has its local offices at Gustav Mahlerlaan 1212, 1088LA Amsterdam, The Netherlands. PGIM Luxembourg S.A. has its registered address at 2 Boulevard de la Foire, L-1528 Luxembourg and is authorised and regulated by the Commission de Surveillance du Secteur Financier (“CSSF”) in Luxembourg (registration number A00001218). PGIM Real Estate Germany AG has its registered address at Wittelsbacher Platz 1, 80333 Munchen, Germany and is authorised and regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) in Germany (registration number 10138142).

In Japan, information is provided by PGIM Japan Co., Ltd. (“PGIM Japan”) and/or PGIM Real Estate (Japan) Ltd. (“PGIMREJ”).  PGIM Japan, a registered Financial Instruments Business Operator with the Financial Services Agency of Japan offers various investment management services in Japan.  PGIMREJ is a Japanese real estate asset manager that is registered with the Kanto Local Finance Bureau of Japan.

In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a regulated entity with the Monetary Authority of Singapore under a Capital Markets Services License to conduct fund management and an exempt financial adviser. This material is issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act 2001 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Section 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.   

Prudential Financial, Inc. (“PFI”) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

*PGIM.com/Podcasts and its content is intended for informational or educational purposes only and is not directed exclusively to Professional Investors. 

PGIM Logo
PGIM Logo

You are viewing this page in preview mode.

Edit Page