InvestmentsNov 27 2015

Fund selector: Central bankers’ bogey issue

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I’m bad at golf. I tell myself it is because I spend too much time in the office, but in truth I’m just bad. So the best ‘foreword guidance’ I can give you is don’t play golf with, or even on the same course as, me.

The guidance we’ve had from the Bank of England, however, isn’t so clear-cut. Its latest says that when interest rates do eventually rise, the increase will be “gradual” and peak at a lower level than in previous cycles.

If we look back to 2013, however, the guidance was very different. Back then, the Bank said it would not raise rates from their current level of 0.5 per cent “at least until the… headline measure of the unemployment rate has fallen to a threshold of 7 per cent, subject to [conditions]”.

Some other caveats were added once this 7 per cent mark was breached in February 2014, including an inflation target. (Wasn’t that where we began?)

Of course, our own central bankers are not alone in moving their markers. We have seen the US Federal Reserve back away from adjusting its own interest rate. Even now, after strong jobs figures released earlier this month, the market still views the likelihood of a rate rise in December as a 50/50 shot. A failure to hike would mean Janet Yellen has turned her back on her assertion that rates would rise in 2015.

Mario Draghi of the European Central Bank has also often favoured words over action, although more recently the president has been able to enact his policies with less friction.

The Gordian knot we face is that central banks have proven themselves as bad at predicting inflation as taxi drivers might be at stock- picking. On average, they are right half of the time.

What we do know is that the longer rate increases are delayed, the less likely the eventual journey will be both gradual and to a lower level than previous cycles. As we have seen from the extended period of extremely loose monetary policy, the link between cause and effect can be a slow journey. Thus, starting to raise rates from a very low base a month or so early may be the more valiant approach.

Turning to another ‘fore’, forecasting: I always get nervous when the Christmas lights go up on Bond Street as that’s when the question is posed: where will the FTSE be at the end of next year?