Investment Newsletter August 2015
Interesting Rates Mike Deverell Investment Manager
On the face of it, interest rate decisions are not necessarily that interesting! For example, the Bank of England’s Monetary Policy Committee (MPC) recently voted to keep the base rate on hold at 0.5%. It has been 0.5% since March 2009 more than six years ago - and during that time there have been 78 MPC meetings without changing base rate. This decision was hardly unexpected! However, looking closely at the meeting minutes and the inflation report they released the same day, it is clear the committee believes the economy is pretty robust. Normally, they would consider increasing rates when the economy is doing as well as it is at present. However, the MPC’s mandate is not economic growth but rather it is to deliver 2% pa inflation (based on the consumer prices index or CPI).
CPI inflation remains at zero. Partly this is a result of falling oil and food prices, however there has been a broader slowdown in prices. Core inflation which strips out food and oil is only at 0.5%. Given the Bank’s remit they can’t consider increasing rates with inflation so low, as this could risk tipping us into unhealthy deflation. The Bank has made it clear they don’t expect inflation back to target until the end of 2016 and so it seems clear they won’t put rates up soon. The market is now pricing a 0.25% rate increase in perhaps May next year.
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