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Wealth Manager shadow MPC votes for rate hike

Ahead of today's crucial decision on interest rates, Wealth Manager assembled its very own MPC to cast its vote. Here are the reasons behind each vote.

Banking on a rate rise

UK interest rates have been rooted at ultra-low levels since the Bank of England did everything in its power to avert a collapse in capitalism at the height of the credit crunch.

Rates were cut by another 25 basis points to 0.25% last summer on the back of Brexit. It has now been more than 10 years since the UK last experienced a rate hike.

However, there are strong signs that this is about to change with markets pricing a 90% chance of a 0.25% increase in rates at today's meeting.

The case for a rate rise is strong, especially given that inflation recently breached 3%. However, with many consumers heavily in debt after taking advantage of low rates and lots of certainty around Brexit would this be a sensible move?

Wealth Manager has assembled its very own monetary policy committee to cast their vote. There was a clear majority with all but one voting for a rate hike.

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Banking on a rate rise

UK interest rates have been rooted at ultra-low levels since the Bank of England did everything in its power to avert a collapse in capitalism at the height of the credit crunch.

Rates were cut by another 25 basis points to 0.25% last summer on the back of Brexit. It has now been more than 10 years since the UK last experienced a rate hike.

However, there are strong signs that this is about to change with markets pricing a 90% chance of a 0.25% increase in rates at today's meeting.

The case for a rate rise is strong, especially given that inflation recently breached 3%. However, with many consumers heavily in debt after taking advantage of low rates and lots of certainty around Brexit would this be a sensible move?

Wealth Manager has assembled its very own monetary policy committee to cast their vote. There was a clear majority with all but one voting for a rate hike.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Edward Park

Investment director, Brooks Macdonald, London

Vote: Yes

‘The market is pricing in a c. 90% probability of a 25bp rate rise in November’s meeting which we think is correct given the recent rhetoric.

‘The major unanswered question is whether the bank intends to go ahead with “one and done” or pursue a progressively higher path of interest rates. We believe that any hike in November will reflect a reversal of the post-Brexit stimulus rather than the beginning of a short term series of hikes.

‘With the UK consumer still heavily indebted (via both mortgages and credit) at the same time as there is a real wage squeeze (inflation rate higher than wage growth) we don’t think the near term outlook warrants materially higher rates. A lot of the higher inflation which may be of worry to the Bank of England is currency related and therefore mostly transient.

‘Without a material improvement in the consumer backdrop (accounting for c. 60% of the economy) we would expect the Bank of England to pause after November.

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Tom Davies

Senior investment manager, Quartet Capital Partners, London

Vote: Yes

‘Brexit has made the Bank of England’s job very difficult. It introduces enormous uncertainty and amplifies moves in sterling so that inflation targeting has become hard to manage given the sensitivity of the UK economy to import prices. The manipulation of sterling via “forward guidance” has therefore become a key policy tool, but we are concerned that the BoE’s credibility is being eroded by a lack of action on rates.

‘We think the base rate should rise by 0.25%, to the pre-Brexit level, so that credibility can be restored to a critical institution in the UK economy. However, don’t be surprised if sterling stays weak. The current account deficit is still stubbornly wide, despite the hope that UK exports might have become more competitive, so sterling may need to fall further to balance the books. This could force the BoE’s hand again, particularly if wages respond.

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Gary Stockdale

Head of research, Vertem Asset Management, Newcastle

Vote: Yes

‘I think the Monetary Policy Committee of the Bank of England should raise interests by 0.25% for two reasons. While governor Mark Carney has overseen a significant strengthening of the financial sector, his forward guidance has been disappointing. So much so that we have come to call it “sliding guidance”. Therefore, after his recent hawkish tones, for the sake of credibility, I feel an increase is warranted.

‘Secondly, with consumer indebtedness rising steadily, removing the post referendum 0.25% cut would send a subtle warning to consumers that rates can actually rise. There are arguably more efficient ways to institute tightening, such as raising the counter-cyclical capital buffers and adjusting risk weightings, but these are technical. They do not carry the same communicative power to consumers. A modest rate rise will be prominently covered by the media, which may well make consumers more circumspect. After an initial rise, the MPC are likely pause and be very data vigilant for the following months.

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John Goodall

Manager for private client research, WH Ireland, Manchester

Vote: Yes

‘We believe that the Bank of England should raise rates on Thursday.

‘With a 25 basis point increase largely priced into futures markets now, and a further hike expected by June 2018, failure to do so now will be harmful to the value of the pound and the BoE’s credibility, especially after many false starts in the past.

‘However, we do not believe it represents the beginning of a significant upward movement in the interest rate cycle. There is limited scope to increase rates significantly. The outlook for growth is weak and uncertain, especially in light of Brexit. The economy has become reliant on low interest rates so any significant upward move is likely to send the economy into recession.

‘Without an upturn in productivity, growth will stay low and Japan is likely to provide the best template for the future.

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Matthew Hoggarth

Head of research, Thesis Asset Management, Chichester

Vote: Yes

‘The post-referendum rate cut was exceptional stimulus to maintain confidence amid fears of an immediate recession during a political vacuum. It has been successful and can be unwound. For investors and currency markets, the tone of the Monetary Policy Committee minutes will be more significant than the rise itself.

‘Rapidly rising household debts alongside falling real incomes do give the MPC a dilemma. Elevated borrowing is concerning for future stability, but also shows how fragile consumer spending is. A rate rise need not be fatal however. 60% of mortgages are now fixed rate, so higher rates can potentially limit incentives for new borrowing without instantly squeezing all existing debtors. Consumers may even see a net benefit if higher rates help to keep sterling stronger, reducing import prices and returning inflation to target more quickly.

‘Ultra-low interest rates are not a panacea. Eventually we must question whether they are contributing to the current low productivity, low growth environment by causing capital to be misallocated.

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Jonathan Bell

Chief investment officer, Stanhope Capital, London

Vote: Yes

‘The base rate should rise by 0.25% to 0.5% in the UK this Thursday. The justification for the rise comes from the increase in inflation with the Consumer Price Index up 3% over the past year and the Retail Price Index up 3.9%. Governor Mark Carney will probably also highlight that at 4.5%, the unemployment rate is below the Monetary Policy Committee’s estimate of its long-run equilibrium and that recent economic growth has been slightly faster than had been expected, at 0.4% for the third quarter. However, Carney will also point to the uncertainty surrounding Brexit and warn that if negotiations with Brussels do not improve, growth could slow and prevent the need for any further rate rises.

‘Nevertheless, interest rates in the UK have started to rise, but only very slowly. Assuming rates increase on Thursday, it may be a year until we see the next quarter point increase.

‘Remember, one advantage of raising rates is that they can be cut if the environment changes.

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Josh Seager

Investment analyst, EQ Investors, London

Vote: Yes

‘The market has priced in a high probability of a rate rise (75% chance by year-end) and the Bank of England rhetoric make this seem likely.

‘By increasing interest rates, you’d also expect to see sterling strengthen but we’ve already seen a jump in the last few weeks with the forward guidance offered by the BoE. As a consequence, we don’t think this represents a buying opportunity for foreign assets. We still expect rates to stay lower for longer and for any rise to be gentle and slow.

‘The anticipated hike is more likely to be a “one and done”, than the start of a cycle due to consumer vulnerability and uncertainties around the Brexit negotiations.

‘For savers this will come as a relief as it holds out the prospect of finally being able to get a “slightly” better return on cash. For investors seeking income (such as those in drawdown) we favour high yielding short dated or floating bond funds which are relatively insensitive to interest rate rises. Given a properly diversified portfolio, the effects should be minor over time for investors.

‘A word of warning. We’ve been here before and interest rates actually ended up going down.

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James Gardner

Head of propositions, Alpha Portfolio Management, Bristol

Vote: Yes

‘The UK has been suffering from a psychological trauma following the EU Referendum result. In order to “save the day”, the Bank of England did what it felt it could. Yet in reducing interest rates, dropping the credit buffer of banks’ capital, and further quantitative easing, it highlighted the few remaining policies available to it for a doomsday type scenario.

‘A reversal of this interest rate decision has been on the horizon for some time, although we feel they would be naive to raise them further. With economic growth the weakest in the G7, a backdrop of ongoing Brexit uncertainty, and a cooling housing market and car sales, there are limitations to how much further rates can rise. This is in spite of inflation forecasts remaining meaningfully above target, historically low unemployment, the prospect of some further slippage in public sector pay caps and a less austere upcoming Budget.

‘Whilst we see the scope for further rate rises as being limited, be prepared for further BoE rhetoric.

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Fahad Kamal

Senior market strategist, Kleinwort Hambros, London

Vote: No

‘The UK’s economy grew at a faster than expected 1.6% annual rate in the third quarter, increasing chances the Bank of England will raise interest rates next month. As a result, sterling shot up by 1% (£1 = $1.33). But it is unlikely British policymakers are embarking on a path of sustained tightening similar to their US or European counterparts. In the UK, higher rates will probably have little impact on lowering 3% sterling-linked, import-driven inflation. It more likely to just make life harder for those already experiencing purchasing power erosion.

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