16th July 2014
The overwhelming majority of investors expect interest rates to rise in the next year according to Hargreaves Lansdown’s Investor Confidence survey.
Yesterday’s surprise jump in inflation from 1.5% to 1.9% has also fuelled speculation that rates will rise sooner rather than later.
Some 90% of investors expect interest rate rises within the next year – the highest level since May 2011 – while 36% of investors expect an interest rate rise by the end of 2014.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown says: “Investors are gearing up for an interest rate rise within the next year, and a substantial proportion expect some movement by the end of 2014.
“The surprise jump in CPI last month is unlikely to prompt a knee-jerk reaction from the Bank of England, it is after all just one data point and still within the Bank’s 2% target. Wage inflation is an important measure they will be monitoring. Provided it remains muted they are likely to view this as an anchor on CPI.
“When rate rises do arrive the Bank of England wants a gradual ascent, and will have the scope to achieve this as long as inflation remains contained, which would make any relief for cash savers muted in the short term.”
Hargreaves says the current interest rate environment presents a conundrum for bond investors in that they like the income paid by bonds, but are wary that rising interest rates will prompt bond prices to fall.
“We think at the present time bond investors should consider Strategic Bond funds which have the flexibility to invest across the fixed interest spectrum, with the potential to offer greater protection from interest rate rises. This does depend heavily on the skill of the manager however. In this sector we like both Invesco Perpetual Tactical and M&G Optimal Income”, adds the note.