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BoE’s Carney looks the odd man out

Ed Monk

Ed Monk - Fidelity Personal Investing

It was only in May that Bank of England Governor Mark Carney warned households that rate rises and more expensive borrowing costs were on the way.


That warning felt a long time ago this morning, as the bank prepared to announce its next decision on interest rates and the economy. No change in the 0.75% Bank Rate was expected but the path for rates has changed in the last few months.

Growth has reversed and inflation in the UK, which the Bank aims to keep close to 2%, has now fallen back below target. A rate rise now would put downward pressure on inflation and be a brake on growth. Given that, it’s very difficult to see how Mr Carney can maintain the stance that the next movement for rates will be upwards.

In truth, the market never really believed the Governor back in May. One of the reasons he gave his warning was that investors were taking one look at the clouds gathering over the global economy and concluding that rates would, if anything, be cut. Carney knew that prolonged expectations of low rates - coming after an historically long period of low borrowing costs - risked creating over-indebtedness among business and households. He wanted to warn them that the punch bowl could soon be snatched away.

The problem, however, is that other central banks around the world have been busy preparing a whole new batch of punch. The European Central Bank last week cut its deposit rate, which was already in negative territory, from -0.4% to a record low of -0.5%. ECB president Mario Draghi also said the bank would restart its quantitative easing (QE) programme, buying €20 billion every month from November. Then, yesterday, the US Federal Reserve also cut rates by a quarter-point with the discussion now on whether there will be another cut this year or not.

Under normal circumstances there would be speculation that the Bank of England will now follow suit with easing of its own. That hasn’t happened yet, and a big part of the reason may be the uncertainty around Brexit, but things could change if the economic data continues to move in its current direction.

What does all this mean for investors? The positive answer is that we could be about to see a new leg up for equity markets. Lower rates typically help businesses and households, which then spend more.

The less positive reading is that markets will suffer if the causes of the lower rates get worse. In other words, if the global economy worsens further and central banks find their efforts to halt the slide don’t work. At that point, investors may take flight from riskier assets.

Our Select 50 list includes a few funds that look well placed to handle the next period for markets, whatever it brings. Lindsell Train UK Equity is UK-focused but includes many companies that trade around the world. Manager Nick Train concentrates on high quality companies that generate lots of cash. That tends to mean they can cope with what the orld throws at them. The fund has done well in a variety of market conditions.

The Select 50 Balanced Fund mixes shares with other assets, notably bonds, to give investors a smoother ride. It has shown its worth in limiting downside risks for investors.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. The Lindsell Train UK Equity Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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