The Bank of England’s loftily-dubbed “Super Thursday” throws up a triple whammy of economic nuggets for analysts to feast on – including an interest rate decision, quarterly inflation report and MPC minutes.
The headline figures in this week’s Super Thursday – rates held at 0.5% and the QE cap remaining at £435 billion – may appear more static than “super”. But the report provides a prelude to a faster and sooner-than-expected rise in interest rates that will have important consequences for savers, investors and the wider economy alike.
In Thursday’s report, the central bank indicated it will increase rates earlier than previously set out in a bid to keep a lid on inflation as it issued a bullish outlook on the global economy.
“Were the economy to evolve broadly in line with the February inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report, in order to return inflation sustainably to the target,’ the Bank’s MPC said.
Inflation, according to the CPI, is currently at 3% – well above the Bank’s 2% target.
The hawkish message from Threadneedle Street stoked expectations of a May rate rise. The markets duly took note, with Sterling rallying and gilt yields climbing after the announcement. The rising pound put pressure on the FTSE 100, in which around 70% of constituents derive money from overseas, with the UK’s leading blue chip index finishing the day down 1.5%. Stock markets across Europe mirrored the mood, adding to the equity sell-off which began at the start of the week when the Dow suffered its worst daily points decline in history amid inflation fears.
So what does Super Thursday mean for savers and investors? Firstly, the prospect of a rise in interest rates will be greeted with glee by downtrodden savers earning measly amounts of interest on savings accounts including cash ISAs – assuming banks pass on higher interest rates to customers.
Indeed, such paltry rates of interest on cash saw investors scramble into higher-risk investments last year. Data released from the Investment Association shows net retail sales of fixed income funds reached record highs of £14.3bn in 2017, with the Sterling Strategic Bond sector seeing particularly strong flows.
But the prospect of an imminent increase in interest rates in an environment of rising inflation spells bad news for bondholders and may encourage a move into shorter-duration bonds.
On the other hand, bond funds may prove an attractive and less risky alternative to equities if the global stock market sell-off continues to gather steam. The ongoing uncertainty around the UK economy and Brexit negotiations makes the UK stock market a potentially risky venture. Equally, the recent stock market dive provides a potential buying opportunity for those contrarian investors seeking value stocks. It all depends on whether one views the sell-off as a much-needed correction or prelude to a crash.
However it plays out, today’s announcement from the Bank of England supports the idea that central banks around the world will tighten monetary policy in response to higher global growth and rising inflation, bringing the era of post-crisis accommodation to an end. And this, taken together with the dramatic stock market plunge, could indicate a significant turning point for markets. This week’s “Super Thursday” may live up to its name yet.