Richard Stone, our Chief Executive comments on what the Bank of England holding interest rates means for personal investors.
Bank of England holds interest rates steady – for now
The Bank of England today, as expected, held interest rates at 0.5%. The balance of opinion shifted though with an additional member of the committee voting for a rate rise taking the split on the committee to 6-3 from 7-2. Immediately following the announcement the Pound rose just over 0.5% and the FTSE 100 fell as markets took this as a signal that a rate rise in August was now more likely.
It is significant that the additional member of the Monetary Policy Committee (MPC) voting for a rise this month was Andrew Haldane, the Bank’s Chief Economist. It is the first time he has been a dissenting voice since he joined the Committee four years ago. It brings the total number of those calling for a rate rise to three as the Committee edges nearer to raising base rates beyond the 0.5% level they were cut to in March 2009.
The weak first quarter economic data put the next rate rise on hold. Since then early Q2 economic data has been mixed, but importantly there are continued high rates of employment and there has now been a return to real wage growth (wages growing faster than inflation). This should result in a continued pick-up in consumer demand within the economy. Combined with improvements in the public finances, giving the Government more scope to increase spending (we have already seen the public sector pay cap go and recent announcements regarding more funding for the NHS), and higher oil prices driving increased costs, inflation may be expected to moderate its recent falls. The Bank of England will be keen to ensure that if inflation does start to show signs of not falling quite so quickly towards the 2% target then that does not get baked into higher wage demands fuelling further inflationary pressures.
We continue to expect a rate rise in August. For investors, this should be seen as a further positive sign of the progressive return of the economy to ‘normal’ following the financial crisis. It may though mean a stronger exchange rate and therefore weaker overseas earnings in Sterling terms for the large multi-national companies that dominate the FTSE100. It may also mean companies with large amounts of debt struggle under an increased interest burden while those companies with strong cash positions will receive a boost, along with personal savers, from higher interest rates.
This should also be seen in the context of the global economic position which remains positive and consequently, central bankers around the world are increasing base rates (as in the US) or reducing bond purchases (as in the EU). The eventual increase in UK base rates above 0.5% will be a further step along that same road for the UK and the Bank of England.
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