INVESTMENT MATTERS
Interest Rates:
Who Do You Believe?
The Bank of England View
The Bank of England’s Monetary Policy
Committee (MPC) has kept the base rate at 0.5%
for 55 months. To go any lower would start to
create problems with negative interest rates in
certain parts of the money market and, as the
previous Bank Governor remarked, probably
would make little difference elsewhere –
decisions rarely hang on a 0.25% margin.
The Bank is now facing a new interest rate
problem. After such a prolonged period of low
rates, the markets are starting to build in
assumptions about future rate rises; something
which the Bank is worried will deter businesses
from making fresh capital investment and
individuals from buying new homes. Interest
rates on 70% of loans to households and more
than 50% of loans to businesses are linked to
Bank Rate, according to the Bank’s research.
The Bank’s new Governor, Mark Carney,
would probably like to say, “Rates will stay put
for another three years” but, in those famous
words of Donald Rumsfeld, the “unknown
unknowns” preclude any such promise. After all,
the Bank never foresaw the 2007/08 financial
crisis…
Mr Carney’s compromise is to offer “forward
guidance”, the latest tool in the central bankers’
armoury. Thus, in August the MPC announced
that it “intends not to raise Bank Rate from its
current level of 0.5% at least until the Labour
Force Survey headline measure of the
unemployment rate has fallen to a threshold of
7%.” At present the unemployment rate is 7.7%
and the Bank projects it will not reach 7% until
the third quarter of 2016.
There were some accompanying “kickouts” for
an earlier change, revolving around inflation and
risks to financial stability. These were intended
to underline that 7% unemployment is not the
only trigger for a rate review.
2016. It has pencilled in an increase somewhere
around the start of 2015. In part that is because
the recent signs of growth in the UK economy are
seen as bringing down unemployment faster than
the Bank expects. Another factor has been the
speculation that US short-term rates will begin
to rise soon, as the Federal Reserve $85bn a
month of quantitative easing is run down.
Longer-term US rates have already risen in
anticipation, as have UK rates. For example,
since Mr Carney announced his 7% target, the
yield on 10 year UK government bonds has
increased by 0.25%.
ACTION
The market’s reaction has prompted the Bank
into a rigorous defence of its policy with Mr
Carney jawboning his critics. For now at least
there is common ground that 0.5% will be with
us throughout 2014.
Low interest rates mean cash on deposit is
losing value, even before tax is considered. For
alternative sources of income, do please talk to
us.
NOTHING CONTAINED IN THE ARTICLE
SHOULD BE CONSIDERED AS GIVING
INDIVIDUAL FINANCIAL ADVICE. PLEASE
NOTE THIS ARTICLE IS BASED ON OUR
CURRENT UNDERSTANDING OF
LEGISLATION, WHICH CAN BE SUBJECT TO
CHANGE. THERE MAY BE VARIATIONS FOR
THOSE LIVING IN SCOTLAND AND
NORTHERN IRELAND.
The Market View
Stuart D Bryant is a fee-based
Certified Financial Planner,
specialising in personal lifestyle
planning and investment
planning. SDB Strategic
Planners Limited is authorised
and regulated by the
Financial Conduct Authority.
The market has chosen so far not to believe
rates will be unchanged until the second half of
Tel: (01782) 712233
48 December 2013/ January 2014