Low interest rates force an investment rethink
In a low yield environment, pension funds will naturally struggle to make returns. Post-Global Financial Crisis, interest rates have been set at unprecedented lows or even in negative terrain in some markets driving down yields. While interest rates will undoubtedly rise at some point – not least in the US – there is less certainty about what the Bank of England’s (BOE) monetary policy intentions will be over the coming months. “If I was speaking in March 2018, I would have said a BOE interest rate rise would be fairly guaranteed. Since then economic data has pointed towards weaker-than-expected growth in the UK, thereby ruling out a rate hike in May 2018,” said Richard Barwell, a senior economist at BNP Paribas Asset Management.
With inflation falling faster than expected and a drop off in consumer spending, many are expecting modest rate rises to be pushed back by the BOE until later in the year. Nonetheless, Barwell acknowledged two scenarios would likely drive the BOE’s monetary policy going forward. “An upbeat scenario could see the data for growth in Q1 being revised upwards, and a subsequent bounce back in Q2 economic data. Equally, if inflation stays stubbornly strong and rising wages keep inflation above the target over the next two years, we would expect the BOE to implement a modest hiking cycle, namely three hikes over the course of three years,” continued Barwell.
A downbeat forecast, however, will spell an end to any imminent interest rate rises, and could conversely prompt the BOE to trim rates and potentially implement another round of quantitative easing. “If the UK loses growth momentum as a result of a cooling in domestic and global demand, coupled with inflation falling below 2% and wage pressure not materialising, there will be no real case to raise rates,” said Barwell. Looking ahead, many investors are conscious interest rates are unlikely to return to levels seen in previous cycles (i.e. 5%), an opinion shared by Central Bankers, academia and other market participants.Download to read more