Inflation targeting really took off as an idea more than 20 years ago – in 1990 just eight central banks had adopted it, but this had risen to more than 50 by the end of that decade. The Bank of England has used inflation targeting since 1992, though its success in keeping to its benchmark over the past few years has been abysmal.
The latest published CPI data for October showed a rise to 2.7% from 2.2% in September. Current Governor Mervyn King has said inflation is likely to remain above target with UK growth staying sluggish.
However, he has also gone on record to say that inflation will likely fall back in the second half of 2013, as the impact of short-term pressures wears off and slack bears down on pay growth. That can only be good news for Carney, who is expected to assume his role as the Bank’s new Governor on 1 July.
QE losing its bite
As I’ve said before, now might be the right time to herald in an age of a more creative approach to central banking – as typified by Mario Draghi at the ECB. Deputy Governor of the Bank of England Paul Tucker recently stated that quantitative easing had “lost its bite” while the consensus appears to be that monetary institutions would welcome some new ideas on the table.
Apart from his comments about inflation targeting, Carney has remained understandably tight-lipped about his plans for his new role, though there is speculation that a move towards nominal GDP targeting may be the right way forward to inspire confidence in the domestic economy.
As far as inflation is concerned, wealth managers generally appear to be preparing for a moderate uplift. Coutts, for example, expects inflation to remain in the 2% to 3% range for the next couple of years, though recognises that there are real risks that could also threaten to push it higher, such as geopolitical tensions and spiking oil prices caused by conflict in the Middle East.
Alan Higgins, chief investment officer, warns against any immediate threat of UK inflation reaching the heights of the 1970s – when it averaged 13% and peaked at 25% in 1975 – though stresses that investors are still guaranteed to lose money by staying in cash with interest rates staying static. A better way of beating inflation, he suggests, is to “move up the risk curve” or look to higher-yielding asset classes.
Equity surrogates
Coutts is currently overweight risk assets – it intends to continue selling out of “equity surrogates” such as high yield and buying into equities direct.
He adds: “It may be time to look at commercial property beyond the West End of London or pharmaceuticals companies at the end of their patent pipeline. Clients have to reach further to find income.”
