Sterling Interest Rate Makes Investment Choices a Tough Call


Another month passes and the Bank of England base rate remains static at 0.5%. With the rate unchanged since March 2009, and a long period of poor returns on cash savings, investors are continuing to make hard decisions about where to receive the best returns on their investments. Is pressure increasing on Mark Carney, Governor of the Bank of England, to finally commit to an increase in the Bank Rate?

In a speech in November Ben Broadbent, Deputy Governor of Monetary Policy, made the point that there is more than the Bank’s inflation target involved in deciding when best to increase rates, not least changes occurring outside the UK and the global commodity market which effect the “real” economy. His defence of the Bank maintaining their current rate sought to explain how these factors help to determine (or not) the “lift-off” date for the next rate rise.

Star fund manager Neil Woodford has also indicated he believes rates will rise later than the consensus expects. In a blog post, Woodford wrote: “We remain cautious of the global growth outlook and, on balance, believe that interest rate increases, both in the US and here in the UK, are further off than consensus has hitherto believed.”

One thing is certain: that the uncertainty about when rates may rise could cause more damage than a rate rise itself, with individuals and businesses stymied in their attempts to plan ahead.  Happily, other commentators seem more willing to commit to a timescale.  Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research, said: ““With inflation expected to remain below the Bank of England’s central target of 2% until 2017, we think the Bank rate will remain on hold until the middle of next year. A rate rise in May or August seems most likely, to coincide with the inflation reports released in these months.”

Watchers of the Bank Rate do seem to agree that even when rates start to rise the increase will be gradual and staged to avoid pushing the economy into a backslide, so those with loans or mortgages needn’t worry that we will be rushing back into the late 80s and early 90s with rates at more than 10%.  The Bank needs to continue to walk the fine line between the benefits of losing “zombie” companies with nothing to add to the country’s overall economy, and increasing the costs to viable companies of investing in their own future growth.

Whoever is right in correctly predicting the date of “life-off”, it seems that savers will have to continue to seek advice about where best to place their hard-earned cash. Back to Ben Broadbent, “I will therefore conclude with something of an apology. For those in the audience wanting me to give a direct and unequivocal promise as to when Bank Rate will change, you will, I’m afraid, be disappointed. I can’t. But you should look on the bright side. If there is any value in listening to people like me, it is to help you with what is the best way to try and predict future interest rates – to forecast the economy yourselves (which is probably more interesting). After all, if the future were perfectly predictable we wouldn’t have to bother trying.”

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