4th February 2016
Maike Currie, investment director for personal investing at Fidelity International, looks at the Bank of England’s first Super-Thursday of 2016…
Given Mark Carney’s cautious comments just a few weeks ago, saying that with the world weaker and UK growth slowing, now was not the time to contemplate raising interest rates, today’s Super Thursday decision to maintain interest rates at 0.5% was largely to be expected.
The surprise element, however, was the Monetary Policy Committee’s unanimous vote as Ian McCafferty, previously the Bank of England’s lone hawk, capitulated and joined his peers by voting in favour of keeping rates at crisis-era lows.
Concerns abound over the outlook for global growth amid worries about emerging markets, in particular China, a slowdown in the US and falling oil prices. Meanwhile earnings growth has dipped below expectations and UK growth has slowed.
Super Thursday sees the Bank of England declare its hand on interest rates, release the latest Monetary Policy Committee (MPC) meeting minutes as well as the latest inflation report, widely regarded as the quarterly ‘health check’ on the state of the economy.
The thinking behind this format, introduced in the latter part of last year, was to forge ‘clearer communications’. Carney wanted to put an end to ‘drip-feed’ of data from the Old Lady of Threadneedle, saying that this left too much room for misinterpretation, although the jury is still out on how successful Carney’s policy of forward guidance has been.
Despite these noble intentions, Super Thursday is now much more aptly referred to as Superfluous Thursday, because regardless of the format of the delivery, it is clear that UK interest rates will not be rising any time soon.
In fact, many now believe that UK rates will stay at their 300-year low for the whole of 2016 – some even speculate that the Bank of England could follow Japan’s lead in joining the negative interest rate club.
Record low rates are just one part of an increasingly challenging backdrop for return-hungry investors. Banks and building societies have slashed interest on cash accounts while the government has made a swift U-turn on its popular NS&I pensioner bonds.
Unsurprisingly, many investors’ have turned to the stock market in their desperate search for income and UK equity income funds have climbed the ranks as a safe haven and a rare source of yield. Fidelity’s calculations show that if a saver had invested £15,000 into the FTSE All Share index over the 10 year period from 31 December 2005 to 31 December 2015, they would now be left with £ 25,768.97.
If, however, they had invested £15,000 into the average UK savings account over the same period, they would be left with £16,096.50. That’s a difference of nearly £10,000 – too big for anyone to ignore.