In Focus: Fixed income  

BoE's 'honesty' means bonds priced 'largely right'

BoE's 'honesty' means bonds priced 'largely right'

It is "encouraging" how honest the Bank of England has been about the outlook for the UK economy, allowing bond markets to price debt "largely right", says Ahmer Tirmizi.

Speaking on the latest FTAdviser In Focus podcast, the investment manager at 7IM said other central banks, such as the US Federal Reserve, had been less straight about the troubles that lie ahead.

This means the bond market had a chance to set the prices right and there should be fewer surprises when it comes to interest rates next year, he added.

Tirmizi said: "One of the things I've been encouraged about is how honest the Bank of England have been, they're telling us that the UK is going to go through a recession, they're telling us that unemployment is going to go up. The Fed isn't doing that.

"And so I think to some degree what they're signalling is largely what you should expect and the market is pricing in 4 per cent rates by the middle of next year or early next year I think. It feels largely right, probably a little bit higher with some surprises to the upside but not the same extent of upside surprises we've seen this year."

The bank has raised the base rate to 1.75 per cent this year as it scrambled to tame inflation, and further hikes are expected, both in terms of interest rates and inflation.

As a result, bond yields have soared, as prices, in tandem with equity values, have crashed.

But some have questioned whether interest rates were the right tool to use, given a sizeable chunk of the inflationary problems comes from abroad, meaning it is not caused by a booming economy at home. Indeed, BoE governor Andrew Bailey has already warned a recession might be unavoidable.

William Morris, head of investments at Weatherbys Private Bank, who also appeared on the podcast, said rates were "absolutely" the right tool to use "despite the fact that a lot of the [pressure] is coming from the supply side" and interest rates were limited to affecting the demand side.

"Part of this is outside of central banks' hands, that doesn't mean that they can abrogate themselves of their responsibility on the monetary policy side."

But he said there were other measures that could have helped, such as decreasing consumers' reliance on the tight energy resources that are driving up prices, for instance by leaving energy prices uncapped and providing targeted relief for those who need it.

"I think there are other ways of getting around the difficulties we face that are not just interest rates, but that doesn't absolve central banks of the need to get on top," he said.