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Points of View: Interest Rates

Last Thursday the Bank of England (BoE) announced that it is holding UK interest rates at 0.5% on the back of weaker than expected GDP growth numbers for the first quarter of 2018 – the weakest quarterly performance in more than five years. The news resulted in the pound falling against the dollar to below $1.35, its lowest level in four months.

The central bank’s governor, Mark Carney, said that temporary weather disruptions in the first quarter of 2018 may have overstated the slowdown in economic growth. He added that the underlying pace of growth remains more resilient than the headline data suggest and that the Bank’s fundamental view on the health of the UK economy has not shifted. Seven of the nine members of BoE’s monetary policy committee (MPC) voted to keep rates unchanged and said that they wanted confirmation that the economy had merely been going through a “temporary soft patch” before voting for higher rates. The two remaining committee members, who voted to increase rates, argued that rising pay caused by falling unemployment required an immediate increase in interest rates and that the economy was strong enough to handle it.

The BoE has cut its growth forecast for the year to 1.4%, down from the forecast of 1.8% made in February. The rate hike has now been postponed to later in the year providing that the economy performs in line with updated inflation projections.

A rise in interest rates will have a negative impact on the value of traditional fixed investments. We are mindful of this and we have positioned our fixed return investments to reduce their sensitivity to interest rate changes.

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