The decision by the Bank of England to double UK interest rates is a negative for the economy, according to Mike Bell, global market strategist at JP Morgan Asset Management.
Last week the Bank of England’s Monetary Policy Committee (MPC) voted to double interest rates to 0.5 per cent.
Mr Bell branded the decision “strange” given his view that said UK economic data is currently “opaque”.
He cited the majority of Purchasing Manager Index (PMI) surveys - an indicator of the economic health of the manufacturing sector - suggesting a positive outlook for the UK economy, but said consumer confidence and levels of business investment painted a more negative picture.
Mr Bell said there are two reasons why central banks raise interest rates. The first is if policy makers fear the economy is growing at an unsustainable pace, usually leading to excessive levels of borrowing.
He said the interest rate rise last week was the “lowest level of GDP growth at which UK interest rates have ever gone up”, which implies the economy is far from over-heating.
The second reason policy makers put interest rates up is to curb inflation.
UK inflation was 3 per cent in September, ahead of the Bank of England’s 2 per cent target.
He is “cautious” on the outlook for the UK economy due to the current lack of wage growth in the economy and the uncertainty over the outcome of the Brexit negotiations.
Ben Edwards, who runs the £565m BlackRock Corporate Bond fund, said he believes the UK market is wrong to price in two further UK interest rate rises by the end of 2019, as has been suggested by guidance from the central bank.
He does not expect last week's interest rise to make any difference to bond investors.
But the fund manager said he doesn’t believe “the economy can stand more increases in borrowing costs. There are too many uncertainties around Brexit negotiations.”
James Foster, who runs the £1.1bn Artemis Strategic Bond fund, said the interest rate rise was already widely priced into the valuation of bonds.
Both Mr Foster and Mr Edwards have been selling their bank bonds. Those bonds would be expected to perform better as higher interest rates take effect. But both fund managers said such positives are already prices into the valuations of those assets.
David.Thorpe@ft.com
