The Bank of England yesterday kept interest rates unchanged at 0.5% for the 85th consecutive month. Weak inflation and slowing economic growth has kept rates at a record low since March 2009, now reinforced by the uncertainty over the UK’s future in the European Union.
But pressure may be rising on the Monetary Policy Committee; the latest UK inflation figure as measure by the Consumer Prices Index showed a rise to 0.5% in March, reaching its highest level since December 2014. However the rise to 0.5% in March is still well below the Bank of England’s target rate of 2%, hardly convincing policy makers to vote for an interest rate rise.
Low inflation has been a boon for the UK economy – encouraging consumer spending along with low unemployment and the return of wage increases. But the outlook of global economy is weak, thanks to concerns over China economy growth slowdown, Europe and the possibility of Brexit. These factors will continue to dominate markets and policy makers’ decisions.
Brexit Continues to Loom Over the UK Economy
The possibility of the UK voting to leave the European Union continues to be a concern, the minutes from the latest MPC meeting showed, and several economists agree.
“The big issue is of course the Brexit vote, and they make explicit reference to this in the statement as a potential source of weaker economic activity in the first half of the year. The Monetary Policy Committee has reiterated its expectation that rates are likely to rise at some point, but nothing will happen until the fog of Brexit clears,” Ian Kernohan, economist at Royal London Asset Management said.
This will also affect consumer spending, and in turn the UK economy, Ben Brettell , senior economist at Hargreaves Lansdown said: “Recent surveys suggest consumers reined in their spending in March – perhaps the first sign of nerves ahead of June’s EU referendum.”
What drove the increase in inflation last month? A sharp increase in air fares because of an early Easter. Air fares jumped 23% between February and March.
A rise on clothing and footwear prices also contributed to March’s increase, however they were partially offset by a fall in other sectors, such as the price of food and a smaller rise in petrol prices compared with March last year.
Investing in an Era of Low Interest Rates
Cash saving accounts currently offer paltry returns in this record low interest rates environment leading investors to seek out yielding assets such as commercial property and UK equity income funds.
Calculations from Fidelity show that if investors put £15,000 into the average UK savings account 10 years ago, they would now have with £16,036.
However, if investors put the same amount of money into the FTSE 250 index over the same period, investors would be have £33,925, earning an extra £17,889 when compared to the cash saving options.
Investors should bear in mind that the best way to achieve long-term growth is through a diversified portfolio invested in a tax-efficient wrapper such as an ISA or SIPP.
