Ross Barr, Senior Investment Strategist at Cardano, comments:

“Today, the Bank of England Monetary Policy Committee (MPC) raised bank rate by 0.25% to 4.50%. This is the twelfth consecutive rate increase delivered by the Bank over the past 18 months.

“We are now approaching the end of this hiking cycle in the UK. However, unlike many market participants, we don’t expect to see rates falling in the near future. Indeed, the market continues to anticipate further increases in the coming months. This is in stark comparison to other economies such as the US where the market is now pricing in cuts for the latter part of this year.

“The MPC remain acutely aware of the pressure from higher than previously expected inflation readings and a tight labour market. Nevertheless, the recent strengthening of sterling, and the base effects of 2022’s energy price rises, will help inflation rates fall significantly through the remainder of this year.

“Inflation is set to fall but at present we think that it will struggle to decisively stay below the Bank’s 2% target. We expect that monetary policy will have to remain in restrictive territory for some time before rate cuts could be considered. This is unlikely to be feasible until the second half of 2024.

“Although the short-term macro picture is uncertain, the UK gilt market now has some favourable characteristics. Like many other government bond markets globally, there is two-way risk. Yields will rise if the improving trend in inflation that we expect in the remainder of 2023 is not seen. However, they would very likely fall during any upcoming recession, especially as the market’s growth forecasts for 2024 are too optimistic in our view. Falling yields in a recessionary environment will prove to be a valuable diversifying offset to equity markets for Pension scheme investors that have bonds in their growth asset allocations, especially relative to other government bond markets.”

Commenting on the impact for corporate sponsors of DB schemes Alex Hutton-Mills, Managing Director at Cardano, adds:

“Whilst stubborn inflation persists the risk remains that interest rates will stay on an upward trajectory, there is a real compounding risk for companies looking to refinance existing debt. 

“Even though some DB pension schemes may find themselves in a better funding position, without proper planning many companies may find it difficult to meet their pension obligations while also managing cash flow and higher borrowing costs.

“Trustees should ensure that they have up-to-date information on the levels of financial debt held by their sponsoring companies, as well as the maturity dates of that debt.”