Today’s ‘Super Thursday’ figures mean little has changed for investors, according to several industry professionals, who believe it is difficult to see interest rates rising markedly over the medium term given today’s low-growth environment.
However, others warn that investors need to keep tabs on inflationary figures which, if the current trend persists, could further squeeze consumer spending power.
This comes following today’s announcement from the Bank of England (BoE) that interest rates will remain at 0.25 per cent, a decision that was voted for by six out of the eight members of the Monetary Policy Committee (MPC).
The MPC also voted unanimously to maintain the BoE’s corporate bond-buying programme at £10bn, as well as to maintain the stock of UK government bond purchases at £435bn.
Other highlights of the meeting include a consensus that inflation will rise over the coming months and will peak at 3 per cent in October, while UK growth will remain sluggish over the near term as the wage growth-versus inflation-imbalance continues to weigh upon households.
Output growth and Bank staff’s near‑term GDP projection
Source: ONS and the Bank of England
In the run-up to this month’s policy meeting, the general consensus was indeed that the bank would not hike rates. This is despite the fact that, in June’s MPC meeting, three out of eight policymakers believed the central bank should start hiking rates – partially in a bid to rectify what have been described as premature cuts to rates in the run-up to Brexit last year.
Prior to today’s meeting, ETX Capital’s Neil Wilson said: “Wage growth is non-existent. Real earnings growth is still negative and although employment levels are at record highs, this has failed to feed through to higher earnings.
“This ought to keep the MPC fairly cautious and probably wait-and-see for more data on this front. Real earnings have fallen 0.7 per cent in the last year.”
Yesterday, chief investment officer at Thomas Miller Abi Oladimeji warned that a rate hike could be misinterpreted by investors and markets could drive much further tightening in financial decisions.
“In light of the prevailing backdrop of elevated political and economic uncertainty, it’s unlikely the Bank of England will decide to change interest rates tomorrow,” he said. “Let the hawks squawk.”
Following today’s figures, Matthew Brittain – investment analyst at Sanlam UK – explained that weakening economic activity and moderating inflation (which fell from 2.9 per cent in May to 2.6 per cent in June, according to the Office for National Statistics) has allowed the BoE to take a more measured approach to tightening monetary policy.
“This marginally more dovish sentiment has no doubt been helped by the departure of long-time hawk Kristin Forbes, and puts the BoE firmly back on track to its ‘slow and steady’ normalisation approach,” he said.
“Coming into this meeting the pound appeared to hold up well on the surface, but against a broader trading basket – and, in particular, the euro – it has been weak, already reflecting expectations for a more dovish outcome.
Performance of currency vs US dollar over 5days
Source: Yahoo Finance
“We expect the BoE to remain dovish as the impact of the weaker pound becomes fully reflected in inflation data over the course of the next 12 months, allowing it to naturally drift back in line with global averages.”
Despite the hawkishness seen from some members of the MPC last month, Zurich’s Martin Palmer said the committee’s side-step today means the record lows which have driven borrowing and supported mortgage repayments will continue.
“Inflation is particularly challenging for those already living on fixed incomes in retirement, but even for those years away from stepping down from full time work, developing a smart investment and tax efficient strategy is possible,” he added.
When it comes to inflation, Coutts’ Terence Moll said there are a number of forces subduing the Consumer Price Index (CPI) such as an ageing population, emerging market manufacturers keeping prices low and fierce retail competition due to the rise of online price comparisons.
However, he said luxury items – which rose twice as quickly in price as everyday goods and services over the last 12 months – could be an ongoing issue.
“Why does it matter? When the returns on cash are lower than the rate of inflation, the value of cash is eroded in real terms – so essentially it will cost you more today to buy the same things you did a year ago.”
Alan Wilson, senior investment manager of active fixed income at State Street Global Advisors, explained that these higher levels of inflation combined with weaker-than-expected wage growth over the last month have indeed given likeminded “committee hawks” food for thought.
“While speculation had grown that there could be further dissenting voters at August’s meeting – with BoE Chief Economist, Andrew Haldane and Governor, Mark Carney the obvious candidates – the hawks in waiting failed to bare their talons,” he said.
“Looking forward, the MPC will maintain its hawkish bias to encourage the market to dampen inflation expectations on its behalf.
“It is very unlikely this signalling will culminate in formal policy action, particularly in the early stages of the Brexit process. Learning lessons from the European Central Bank, the MPC will continue to tread lightly and resist the temptation of tightening amid transitory inflation pressure.”
In terms of what this means from an investment perspective, Tom Stevenson – investment director for personal investing at Fidelity International – said it is simply a case of “more of the same”.
“It is hard to see interest rates rising very far, very fast in the current sluggish environment,” he said. “And with no pressure from other central banks - the US, Europe and Japan are also loath to tighten prematurely - we should expect the Bank to remain on its lower-for-longer trajectory. I would be surprised to see any hike at all this year.
“At the risk of sounding like a cracked record, cash remains trash in today’s environment. With this in mind, anyone with savings still sitting in cash will continue to struggle to generate a real return.”