The ‘slow and gradual’ UK interest rate outlined by the Bank of England will be too little, too late, according to Brooks Macdonald’s Toby Thompson.
Though it is the imminent US interest rate rise currently occupying the global investment headlines, the consensus is that its UK counterpart will not be far behind.
However, while Bank of England governor Mark Carney is sticking to his “slow and gradual” mantra, Thompson, manager of Brooks Macdonald’s Global Equity Income Fund, believes that the window of opportunity for this measured increase has gone.
Mark Carney has been saying for some time that the peak level in the next cycle is going to be significantly lower than previous ones,” said Thompson.
“The theory is that the rise will begin some time away from now, start slowly, then end up at a very low point. But I do not think that all of those three things are possible, given what is happening in the UK economy.
“If we want to go gradually and end up at a relatively low finishing point, the rate rise needs to start imminently, and maybe should have started already.”
Thompson outlined economic factors “outside the Monetary Policy Committee’s control” which are threatening to derail the sanguine approach to the interest rate rise.
“At the moment there are various things that have brought inflation down to the current level, such as commodity and food prices,” he explained.
“However, we have started to see an acceleration in private sector pay growth, and the danger is that we will see wage push inflation. Once that starts, interest rates will need to go up quite quickly. So if the BoE holds back – i.e. into next year, as the market is expecting – then in order to finish at this ‘low’ point interest rates might have to go up quickly rather than gradually.”
The impact of this would be felt, says Thompson, in just the bond market but also by equities, stemming from the central bank’s tendency to be slower out of the blocks than financial markets.
