Investment Newsletter November 2015
Should the Bank of England put up interest rates? Mike Deverell Investment Manager
That’s the question that the Monetary Policy Committee (MPC) has to face at each meeting and it’s a decision that Bank Governor, Mark Carney, said would come into sharp focus around the turn of the year.
The Bank’s primary aim is to get as close to 2% inflation as possible. If the Consumer Price Index (CPI) is more than 1% higher or lower than the target, then Mr Carney has to write a letter to the Chancellor to explain why.
Last week the Bank released its quarterly inflation report, and this neatly illustrates the quandary that policymakers face. The Bank of England is tasked by the government to fulfil the following objective:
Historically, it was thought that price stability would mean economic stability, and as a result the inflation target has always been seen as the primary objective. More recently, the second part “to support the Government’s economic objectives” has become more important, particularly as inflation has deviated wildly from target.
“To deliver price stability and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment.”
Interest rates have been at 0.5% since 2009. From 2010 until the end of 2013, inflation was generally above target and was even above 3% for an extended period. The normal response to rising inflation is to increase rates as this is usually associated with an overheating economy. This clearly was not the case back then and so the Bank rightly did not put rates up because of economic factors.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.