Jupiter’s Gunn readies £1bn fund for speedy rate rises

Jupiter’s Gunn readies £1bn fund for speedy rate rises

Alastair Gunn, who runs the £1bn Jupiter Distribution fund, is preparing for UK interest rates to rise at a faster rate than the market currently expects.

The Bank of England (BoE) lifted rates to 0.5 per cent in November, but signalled they may only rise twice more before the end of 2019.

The central bank forecasts UK inflation, currently 3 per cent, will fall back towards its long-term target of 2 per cent during 2018, while the Office for Budget Responsibility (OBR) downgraded its forecasts for UK growth for the years ahead, expecting the economy to grow at 1.5 per cent in 2017, a sharp drop from its previous 2 per cent forecast.

If inflation expectations are muted, and economic growth rates declining, traditional economic theory would suggest that rates don’t need to rise quickly.

But Mr Gunn said he can see several reasons why interest rates need to go higher.

"First, with the economy set to grow at a lower overall speed limit, a mix of near-full employment but minimal productivity growth means it only takes a little bit of wage growth to create inflation.

"Unlike the one-off inflationary impact arising from the post-referendum fall in sterling, stronger wage growth is likely to have a more permanent effect that the BoE will not be able to ignore.”

Economists has been puzzled in recent years by the fact that while unemployment has fallen in the UK and US, inflation, and particularly wage inflation, has not risen at the same rate.

Traditional economic theory, known as the Phillips curve, states that higher rates of employment leads to higher inflation, and necessitates interest rate rises.

John Greenwood, chief economist at Invesco Perpetual, said the link between employment and inflation is not proven, as inflation only rises if those extra workers both spend the extra income they receive and borrow more, and this is not happening.

Richard Buxton, head of UK equities at Old Mutual Global Investors, said that while factors such as technological advances, globalisation and ageing populations may have the effect of slowing down wage growth, “you can’t stop nature, and it is a law of nature that if there are fewer available workers, then wages will go up”.

He added: “It's people’s belief that there will be some agreement on Brexit ahead of the final separation which suggests the spending plans of consumers and companies, which are currently on hold, will be reactivated. That could push the BoE in the direction of higher interest rates.”

Mr Gunn said the other reason interest rates might rise is so the central bank has scope to cut them later, if the outcome of the Brexit negotiations is a “no deal”.

The fund manager then turned his thoughts to where he is investing for income in the year ahead.

He said: “For the first time in many years the global economy is outperforming most predictions and we expect this strength to continue in 2018.