4th July 2013
Henderson’s chief economist Simon Ward has implied that markets are being overly hasty in assuming that the Bank of England is committing to maintain low interest rates.
He suggests the market should wait until the publications of minutes of the meeting although the new regime at the Bank has obliged by providing a policy statement which is unusual for a no change month.
It is, of course, not a ‘no change’ month in terms of personnel at the bank.
Ward says: “The Carney-led MPC has broken with tradition by issuing a policy statement in a “no change” month. The key sentence – stating that the recent rise in the expected future path of Bank rate is not warranted by the Committee’s economic assessment – falls a long way short of “pre-commitment”; after all, if growth and inflation surprise positively – viewed as likely here – the assessment will change and the current expected path may be validated.
“Markets, however, believe that the statement is a downpayment on a more substantive commitment to maintain low rates to be unveiled in August. This may be premature – minutes of this week’s meeting should be awaited before assuming either that Mr Carney wants to tie future Bank rate to intermediate targets such as the unemployment rate or nominal GDP, or that other MPC members will fall in behind a policy change for which none has yet expressed enthusiasm.”
Yet Adrian Lowcock, senior investment manager, at Hargreaves Lansdown believes it is quite a strong signal of intent with its view that bonds has risen too far.
He says: “It was always unlikely Mark Carney was going to take any action on interest rates or increase the amount of Quantitative Easing from £375bn in his first Monetary Policy Committee meeting. However, he has stamped his authority with the Bank of England statement giving some guidance on the future of interest rate movements. They have indicated that interest rates of government bonds had risen too far and the Bank of England base rate would remain lower for longer. As a result UK stock markets and bond markets have risen, with bond yields falling.
“We believe the call for a great rotation out of bonds has been overstated and have not been seeing it from our clients. Bond yields are likely to remain low for some time with a ceiling on how far they can rise. How long it takes to get back to a full recovery has been underestimated although the economic data has been improving with recent updates showing the UK avoided a double dip recession. The UK economy may well be out of intensive care but it still has a long way to go before interest rates will rise.”