News

In the light of recent data releases, the Mansion House speech from Mark Carney and our recent ‘Thought piece’ on the outlook for UK Interest Rates, we thought we should revisit the topic outlining what, in our opinion, has/has not changed.

Last week’s UK job numbers showed how strongly the economy is growing, with a 345,000 jump in employment between January and April, the largest increase on record. This has brought the unemployment rate down to 6.6%, below the most recent forecast made in May by the Bank of England’s Monetary Policy Committee’s (MPC) Inflation Report. What is more, the proportion of these moving into full time employment, at almost two thirds, was especially positive.

Despite this there still seems to be sufficient slack in the economy to prevent pay growth from picking up; in fact headline annual pay growth fell to only 0.9% in April. This was well behind the Consumer Price Index, which rose 1.5% in the most recent release for May. This lack of inflationary pressure gives the MPC a good excuse to avoid raising rates.

Up until Mark Carney’s Mansion House speech last week, the market was certainly expecting that the MPC would delay raising rates for as long as possible, probably until the second quarter of 2015. He surprised his audience by suggesting rates may rise sooner than expected, reflecting the buoyant housing and jobs market.

Since then sterling has risen further, particularly against the euro, and market expectations of interest rates rising have been brought forward. Deutsche Bank has suggested that the market is now pricing in a rise as early as November. However we are not convinced, believing the MPC is still likely to use the excuses of slack in the economy, low inflation, above average underemployment (as a result of the rise in zero hours contracts and part-time working), and weak wage growth to avoid raising rates until next year. This may, however, now happen in the first quarter rather than the second.

As such, we believe the environment remains positive for real assets such as equities and property and continues to justify our overweight position in equities.