Asset managers and economists are warning of a need for caution following the Bank of England’s interest rate decision and inflation report yesterday (11 May).
Schroders Fixed Income fund manager, Alix Stewart, said the decision to keep the base rate at 0.25 per cent and inflation report were based on “some fairly optimistic assumptions”, including the assumption that the UK’s exit from the European Union would be smooth.
“Given recent political headlines this is certainly not a given,” he said.
The Bank of England’s monetary policy committee (MPC) decided to keep base rate at 0.25 per cent, voting 7:1 in favour of the stance.
Only Krista Forbes, who is due to leave the MPC in June, voted for a rate rise.
The Bank also appeared upbeat on the UK economy, predicting that rising net foreign trade and business investment would compensate for weaker customer spending.
The Bank is also forecasting an increase in wage growth from the end of 2017.
Economist Howard Archer, from IHS Global, said that the Bank's forecast relied on “some highly uncertain and questionable assumptions”
“The first is that the adjustment to the UK’s new relationship with the European Union is smooth,” he said. “Secondly, that wage growth will start to pick up over the coming months and will rise significantly during 2018 and 2019.”
“We hold the view that the Bank of England is being too optimistic on the UK growth outlook."
The Bank’s inflation report suggests that consumer price inflation (CPI) will peak at just below 3 per cent in the fourth quarter of this year, before stabilising just above the 2 per cent target for inflation, averaging at 2.3 per cent in the second quarter of 2020.
Despite inflation overshooting target, Mr Archer said he did not believe that interest rates would increase for several years.
“While we believe the next move in interest rates will be up, we do not see this happening until 2020 given the likely prolonged economic and political uncertainties centred on Brexit.”
Patrick Connolly, communications manager at Chase de Vere, said: "It is no surprise that interest rates have been held at just 0.25 per cent. The UK economy faces major challenges and uncertainty with Brexit on the horizon, a general election, muted productivity, inflation creeping up, lack of real wage growth and huge levels of government and personal debt."
However Ben Brettell, senior economist at Hargreaves Lansdown, said that investors should be ready for a shock early rate rise.
“It might not take much positive economic data to persuade further MPC members to join Forbes and vote to hike rates, though it should be noted that she is due to leave the MPC at the end of June,” he said.
Philippa Gee, director of Philippa Gee Wealth Management, said that advisers must be mindful of risks when advising their clients.
"There is so much potential risk present at this point that the inflation and interest dilemma just fuels this concern. It is important to take account of these risks for investors and reflect them where possible in their recommendations," she said.
rosie.murray-west@ft.com
