The market may be underestimating the potential for UK interest rates to rise in the near future, Job Curtis, who runs the £1.6bn City of London investment trust, has said.
The Bank of England lifted interest rates to 0.75 per cent on August 2, the highest level since the financial crisis, much to the dismay of some industry commentators, who thought the decision was unnecessary.
While Mr Curtis said it was not certain rates will rise even further, he feared higher inflation could force the central bank to put put interest rates up.
A rise in inflation could be caused by a further sharp fall in sterling or a continued decline in the number of EU migrants coming to the UK to work, he said.
A fall in sterling causes inflation to rise as it makes the cost of imported goods more expensive. Fewer migrant workers in the economy might be expected to push wages upwards, which is inflationary.
Mr Curtis’s comments come in light of the latest data from the Office for National Statistics (ONS), released this morning (14 August), which shows unemployment fell to 4 per cent in the second quarter of 2018, while the number of EU workers in the country has declined.
As FTAdviser has previously reported, David Jane, who runs about £960m across a range of four multi-asset funds at Miton, said events in China mean investors should expect inflation to keep rising.
Mr Curtis said the price at which UK government bonds currently trade indicates the market is not expecting further interest rate rises.
Generally speaking, when interest rates rise, bond prices fall, because investors want to sell the bonds already in issue and use the capital to buy bonds issued at the newer, higher, interest rate.
Mr Curtis said if rates do rise, then the shares of banks and insurance companies would be expected to benefit.
The Bank of England has actually described the mathematical approach it is taking when deciding whether a rate rise is appropriate.
The central bank’s chief economist Andy Haldane told the Treasury Select Committee in February 2018 that he expects the normal level of GDP growth in the economy to be about 1.5 per cent, so if growth is significantly above this, at 1.75 per cent or higher, at the same time that wage growth is positive and inflation is above 2 per cent, then all else being equal, rates should rise.
The Bank of England’s mandate is to achieve a rate of inflation of near to 2 per cent.
Stewart Robertson, senior economist at Aviva Investors in London, said: "With trade tensions rising and Brexit uncertainties ongoing, the outlook is still cloudy.
"In justifying its decision to hike rates, the Bank of England cited demand growth of 1.75 per cent, ahead of potential [growth] estimated at 1.5 per cent.
"It is not impossible that this may see the strongest growth of GDP for the UK and if that is right, the Bank’s assumption [that it was right to raise interest rates this month] will be challenged."
David Scott, an adviser at Andrews Gwynne in Leeds, agreed the continued policies of global governments and central banks were likely to keep inflation rising, broadly in line with Mr Curtis' view.
James Pigott, of advice firm Pigott’s Investments, meanwhile, said he was a fan of the City of London investment trust.
He said: "Job is a steady Eddie! It works for income investors and for lower risk capital preservation portfolios. Income should always be part of any portfolio and City produces a reasonable yield with lower risk than most equity trusts. The 50 years of increasing dividends makes it a flagship."
david.thorpe@ft.com
