Should the Bank of England raise rates?
Oh boy, its August already and as I look back on this year so far, I soon realise that it has been quite a
journey as we start seeing ourselves reach a very interesting period in the markets. Markets are strong,
and the fundamentals are continuing to surprise the upside, however the nervousness of investors
sentiment is letting the growth down.
Tomorrow, the Bank of England’s Monetary Policy Committee (MPC) could decide to raise the interest
rate for only the second time in a decade. As it stands, economic data is strong globally and the politics
are undermining a seamless growth trajectory. This is now the time investors look at central bankers
to see what stance they take with demand side policies, particularly monetary policy. The financial
markets still seem to have an interest rate increase priced in for tomorrow. However, if the
combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored
in the larger service sector, the Bank of England’s decision will be far from unanimous and they may
even yet find a reason to not rise rates.
Despite the pressures of Brexit, it is anticipated that the MPC
members will raise rates. As inflation isn’t higher than it should be, at 2.4% we have an environment
where we have just enough strength within the economy to raise it and get away with it, and the
backdrop is still having interest rates at low levels regards to history, so we need to normalise to be
able to move. This will be the argument that really shifts the members decision tomorrow.
Nevertheless, not everyone is convinced that the Bank of England’s Monetary Policy Committee will
raise UK interest rates from 0.5% to 0.75%. Despite the “hype” of a rate rise, it may not happen. For
example, back in May, an interest rate rises of 0.25% was signalled to definitely happen, but we all
know that it never materialised as the vote within the MPC members was quite high. Since then,
tomorrow has been positioned as the date to watch, but market makers and economists do still find
that it is unlikely we’ll be seeing any movement this time round. In some respects, a reality check is
needed.
Like all arguments, there is always two sides to the coin…
The case for raising rates…
What the latest figures show is that people have been cutting back on their savings quite a lot because
it’s quite cheap to borrow now, so we’ve got an imbalance in the economy between borrowing and
saving which is a very common economics problem. The longer we carry on at these very low interest
rates, the worse that problem is going to get, and we remember before the financial crisis, that was
preceded by a big amount in borrowing, and we just don’t want to go back into that situation again.
Economists are concerned that the UK economy needs to somehow get to a “normal level” of interest
rates, however it cannot be achieved in an instant, as the demand side policies take time to actually
work. Raising interest rates can only be done gradually, but if central bankers keep putting it off, at
some point they going to be pushed into raising the interest rates at totally the wrong time, or they
are not going to have time to raise them when central bankers want to.
The case against raising rates…
Of course, the problem is that the uncertainties facing the economy are huge with Brexit and we hope
that governor Mark Carney has a plan. He will take
a very resilient economy. The second quarter has been a bit better than the first, but the car industry
is already saying that it might have to cut down its operations in this country.
Car exports have been one of the biggest exports for us, so that could slump rapidly, and we normally
do pride ourselves on our manufacturing sectors. Given the overall uncertainty for the economy,
really, it’s the time for doing nothing that would worry everyone, despite the pressures that normal
interest rates are needed. However, the time might not be now, or is it based that demand side policies
are lagged policies that could generate stimulus for when we do leave the European union?
For anyone who wants further data to substantiate the position please review the attached Global
Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track remain relatively flat as not much
has been happening in the markets. the main markets to focus on are the US markets which in turn
lead the rest of the world, as they are stable despite the technology stocks hurting the NASDAQ. With
Asia, the Japanese Nikkei 225 has been one of the bright spots as the Bank of Japan said that they will
not raise interest rates for the moment, boosting investor confidence for today’s trading. Activity in
China’s smaller factories has slipped to an eight-month low in July. With the PMI dropping, new export
orders fell at the fastest pace in two years.
As it is now central bankers time to decide on what to do with monetary policy (US today and UK
tomorrow) this could benefit the markets as it is priced into the markets, and from here on in, further
rate hikes globally are going to be few and far between because UK economic growth is so fragile.
With the model portfolios, they are all positive over the past week with the returns being gained in
the equity side, and the preservation of capital element from the non-equity side. The split between
the equity classes means that we can gradually meet our expectations and generate the returns we
aim to receive.
Important Information
The data above will not directly correlate to the indices as there is always a delay in pricing because the US
markets close significantly later than the European markets and the Asian markets. The data set above reflects
the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays.
You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in
price or value and you may get back less than the amount originally invested. Past performance is not a
guarantee of future performance. Performance figures quoted include the fund manager charges but exclude
other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless
otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1981, Music TV, also more commonly known as MTV premiered! Cashing in on a new
form of popular entertainment, the MTV network debuts, complete with “video jockeys” (VJs)
introducing music videos, a way of both listening to and watching popular songs. The first video shown,
‘Video Killed the Radio Star,’ prove partially prophetic. How ironic!
As always have a wonderful week and stay safe.
VBW
Jason
