Ahead of the Bank of England’s decision on UK interest rates tomorrow, Kevin Doran, chief investment officer at AJ Bell, comments on the likelihood of a rate cut:
“Anyone who’s been following UK interest rates closely will know that the decision faced by the MPC is finely balanced. Whether the anecdotal evidence of the ‘Boris bounce’ and encouraging flash PMI data is strong enough to out-do slower retail sales and sluggish economic growth remains to be seen, but with Mr Carney likely to practically abstain in his last committee meeting, it’s hard to see enough members crossing the lobby to bring rates down this month.
“The fact that such fine margins are being discussed demonstrates just how addicted the UK economy has become to easy money since the financial crisis. A world where composite PMIs are above 50, unemployment is at generational lows and asset prices at all-time highs hardly seems like the backdrop to lowering rates, but who knows? When you get too close to the Earth, it can look flat. Maybe the MPC members have their ears just a little too close to the ground.
“While some mortgage borrowers might benefit from a rate cut, we all know that banks have a poor record of passing interest rate cuts on to cash-strapped home owners. On the other hand long suffering savers would likely see a cut to their rates and the value of their cash further eroded by inflation, even if this has been falling over recent months.
“An interest rate cut would further enhance the yield on offer from UK shares which sits at a hefty premium to anything that can be achieved via cash or Government bonds but much of this will already be priced in to equity valuations.”
