Business
It’s only halftime, with the Bank Rate to stay at 0.5% for four more years. In March 2009, with the UK in the throes of a deep recession and stock markets tumbling, the Bank of England cut
interest rates to 0.5%. Four years on they remain at historic lows - and there’s no sign they will rise any day soon
How long will the Bank Rate stay at 0.5%? It is the ‘lower rates for longer’ that will
continue to produce the most support for the economy, and we can easily see the Bank Rate staying at its rock bottom level for another four years. We would hope that the governor-elect, Mark Carney, follows the US Federal Reserve’s lead and provides some forward guidance by committing to keeping rates ultra-low for some time to come. What next for monetary policy? At the outset it was hoped that quantitative easing would kick-start the UK’s flagging economy, yet the UK contracted by 0.3% in the fourth quarter of 2012, raising the prospect of a triple-dip recession this year. Tat has led to recent rhetoric from policymakers and Mr Carney on what other monetary policy avenues can be explored. A further cut in the Bank Rate has been vetoed up to now. Where can investors find a decent level of income? Te problem with staying in cash is that had
you invested £100 at the start of 2007, it would now be worth only £94 in real (post-inflation) terms. With interest rates likely to remain below inflation for the foreseeable future, cash will continue to offer negative real returns. It’s why we favour high-yielding equities with adequate earnings to cover dividends, and high-yield bonds and emerging market debt within fixed-income.
12
waterfrontmagazines.co.uk
We also favour stocks that are defensive in nature and typically move much less than the FTSE 100. Tey also tend to pay much higher dividend yields than their riskier cyclical counterparts. Is there more QE in the pipeline? Until recently analysts had thought further
QE action in the UK was unlikely, with inflation persistently above the 2% target (and expected to remain so for some time) and various members of the Bank’s Monetary Policy Committee (MPC) expressing doubts about the effectiveness of further asset purchases. But speculation has increased that the MPC
will vote for a further extension of QE following the revelation in February’s meeting minutes that three members had voted for a further £25bn of asset purchases. Tat revelation came when the committee said that it was willing to overlook persistently high inflation over the next two years, rather than risk hurting the economy by removing monetary support. It also coincides with new figures that showed a fourth quarter decline for the Funding for Lending scheme. Outstanding stock of lending to the real economy is now below the level it was when the scheme was launched in mid-2012. Yet, we do not expect the BoE to restart the
printing presses for a further instalment of QE, given the questions about its continued efficacy. Even if a further £25bn of gilt purchases is forthcoming, we believe the amount is so small
in the context of the overall QE figure of £375bn that it wouldn’t make much difference to the economy. Will we see negative interest rates? Much has also been made over BoE deputy
governor Paul Tucker’s remarks on the introduction of negative interest rates. But the practical problems of implementing this are significant and the Bank has already highlighted the drawbacks. However, the marginal benefit of shaving
a further fraction of a per cent off borrowing and savings rates could likely be achieved by other measures with less risk of unintended consequences. We believe that measures to promote demand will increasingly focus on specific areas of the economy, such as small businesses.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68