Strategists and fund managers have said this month’s Budget speech could be a key moment for UK investors.
Reports last week revealed that chancellor George Osborne is planning to use his forthcoming March 20 Budget speech to usher in an era of less constrained monetary policy, by changing the Bank’s formally stated remit.
The change would coincide with the arrival of Mark Carney as governor in July, according to the reports.
Frances Hudson, global thematic strategist at Standard Life Investments, said Mr Osborne may look to introduce a wider mandate for the Bank to target growth and not just inflation.
But Ms Hudson also said she found it “puzzling” that the government was reportedly considering an employment target, such as the one used in the US.
“In the US there is a strong link between employment and growth, but that doesn’t exist so much in the UK,” she said. “The government could give the Bank a GDP target but I’m not sure it can deliver that.”
Alec Letchfield, chief investment officer at HSBC Global Asset Management, said: “I don’t see how [George Osborne] can make any changes before Mark Carney arrives.
“He may give options but I can’t see how he can, for example, task Carney with targeting unemployment, as you’d expect Carney to want to be involved.”
Mr Letchfield also warned that any radical changes to the way the Bank operates could result in “unintended consequences” for markets.
Targeting employment, he said, could lead to an increase in volatility as markets attempt to anticipate action. Unemployment figures tend to be more volatile than inflation.
“It’s clear that there is a desire to reassess the way in which the Bank of England operates and what it does in terms of inflation,” Mr Letchfield said.
“There is an appetite for doing something different in the UK. The challenge is knowing what Mark Carney is going to do.”
Chris White, UK equity income fund manager at Premier Asset Management, said: “It is difficult to see how radically things are going to change. I don’t think there is a magic wand.
“It’s clear that we do need growth to gain more income through tax to reduce the deficit and pay off our debt.
“It’s difficult to see how monetary policy alone could do this – the government is wedded to its austerity plan so [Carney] is not going to get fiscal support.”
Elsewhere, last week the Bank left the base interest rate unchanged at 0.5 per cent, making it four years since the ultra-low rate was introduced.
The quantitative easing (QE) programme was kept at £375bn in spite of many predicting it would be extended.
In the previous meeting Bank governor Mervyn King and Paul Fisher voted for a QE boost.
Pressure builds on Carney to save UK economy
Mark Carney has been built up by the UK press as something of a ‘knight in shining armour’ ahead of taking on the role of Bank governor in July. Standard Life Investments’ Frances Hudson said there was a danger of “expectations running away with themselves over and above what he can achieve”. But what options are open to the first non-British governor of the Bank of England?
Target employment...
When it launched its programme of open-ended quantitative easing (QE) last year the US Federal Reserve said it would monitor labour statistics in order to assess when it will stop pumping money into the US economy. The Bank of England may be given similar powers but the dynamics of the UK economy are markedly different from the US.
Get aggressive...
Alternatively, Mr Carney could choose to extend the UK’s own QE programme beyond just buying government bonds. If the Bank buys corporate bonds or equities it will likely push prices up.
Or aim for something else...
In his role as governor of the Bank of Canada, Mr Carney has maintained a 2 per cent inflation target, similar to the UK. Once he crosses the Atlantic, however, he may push for a different target, such as GDP growth, or a combination of multiple targets, although he distanced himself from the former when speaking in front of the Treasury Select Committee last month.
Growth barriers ‘could be removed’
John White, UK equity fund manager at GLG, said a negative figure for economic output in the first quarter of this year was “certain” and urged the government to relax regulatory barriers to growth.
The manager of the £303.7m GLG UK Select fund said: “Politicians should focus on growth and in recent years the linkages between regulation and legislation to growth have been ignored.
“We are now suffering from the unintended consequences of a regulatory framework that punishes all risk taking whether reasonable or not. The current situation is unlikely to improve until the complexity of bank regulation has been simplified. It is essential for the banking sector to operate effectively as that is where the multiplier effect for the economy is generated.”
The manager also highlighted stamp duty as an issue. “The increase in stamp duty a decade ago was designed to cool down the housing market but as this sector now needs growth it would make sense to temporarily reverse this decision,” he said.
GDP slumps
In Q4 the UK economy contracted by 0.3 per cent, the fourth time in five months GDP growth has been negative. With the Olympics to thank for the 1 per cent Q3 figure, pressure is growing on the government to improve the country’s prospects.
