NEWS I INVESTMENT
OVERVIEW I REGISTER
FOR NEWS UPDATES I
Rise Is No Surprise, But What's The Impact?
the Bank of England’s Monetary Policy Committee (MPC)
voted to increase the cost of borrowing in the UK from the
48 year low of 3.5%, adding 0.25% to raise the rate to 3.75%.
The last time the MPC chose to raise interest rates was in
February 2000, although the flagging global economy during
the subsequent three years has seen interest rates across
the world fall as central banks attempted to shore up sluggish
economic growth. The decision was widely anticipated by analysts
following the continued strength of the housing market and
spiralling consumer debt. The minutes of the October meeting
showed that four of the nine members of the committee had
voted for an increase last month on concerns of rising consumer
debt and the strong housing market. In a statement released
after the decision the MPC revealed that it felt a "modest"
increase in the rate was needed to keep in line with the inflation
target rate of 2.5%. Inflation has remained slightly above
the Bank of England’s target for the last 12 months
and the MPC has concerns over the stimulative nature of current
policy. However, we do not expect a significant rise in inflation
over the next 12 months.
rate rises to come?
It is unlikely that a single increase of 0.25% will be enough
to dampen the ongoing boom in house prices and consumer debt/spending.
"Neither household spending nor the housing market have
slowed by as much as the committee expected," the MPC
commented after the decision. While the subsequent comments
seemed to be an attempt to re-assure financial markets that
back-to-back rate rises were not anticipated, market expectations
have currently priced in interest rates at approximately 5%
by the end of 2004. "At Charcol Aitchison & Colegrave
we are slightly less pessimistic than the current market view
and anticipate that interest rates will be raised to 4.5%
over the next 12 months," says David Thomson, Head of
Impact of rate rise on bonds
"In the short term it is possible that investors in corporate
and government bonds may encounter some volatility, with the
potential for some capital loss as markets tend to overshoot
following interest rate increases," David explains. "Over
the longer term, however, i.e. the next twelve months, we
feel that the market has already fully priced in the extent
of the UK rate rises." While we have seen a volatile
period in corporate bonds over the year so far, corporate
bonds are broadly back at the level where they began the year.
As we believe that much of the future rate rise expectations
are priced into the market the longer term impact on bond
prices should be limited, and we feel that at current levels
bonds offer reasonable value. Yields have already risen from
the lows reached in June as much of the uncertainty that drove
the price of bonds, notably the war in Iraq and disappointing
economic data releases, have been removed and investor sentiment
has shifted back in favour of equities. Corporate bonds have
outperformed government bonds throughout 2003 and we currently
do not see much further scope for this outperformance to continue.
However, "corporate bonds do continue to offer an incremental
yield above gilts and therefore a well researched and diversified
portfolio of corporate bonds should offer the opportunity
to out perform cash and government bonds," David concludes.
Market Views – By Region
note that while the above is our indicative asset allocation
for a Balanced portfolio your own portfolio may vary significantly
due to your own personal circumstances. For specific fund
recommendations please contact either your usual Consultant
or E-Mail: [email protected].
For financial news and information designed to enhance investment
returns and minimise taxes, please visit our website at www.charcolac.co.uk.
report is prepared for general circulation and is circulated
for general information only. It does not have regard to the
specific investment objectives, financial situation and the
particular needs of any specific person who may receive this
report. Investors should seek financial advice regarding the
appropriateness of investing in any securities or investment
strategies discussed or recommended in this report and should
understand that statements regarding future prospects may
not be realised. Investors should note that income from such
securities, if any, may fluctuate and that each security’s
price or value may rise or fall. Accordingly, investors may
receive back less than originally invested. Past performance
is not necessarily a guide to future performance.