The Bank of England should have kept UK interest rates at 0.5% until Brexit uncertainty has abated, which could be five years away, according to David Coombs, head of multi-asset investments at Rathbones.
Speaking to Morningstar.co.uk about an hour before the Bank unanimously decided to hike rates to a nine-year high 0.75%, Coombs said he was likely to be a buyer of UK Government bonds this week, should they sell off due to what he called “a complete error” of monetary policy.
The hike had been well telegraphed, but opinion on whether it’s the right thing to do differs. Whether commentators think it’s a good or bad move depends on their view around the UK economy.
Coombs says he has just two names that are exposed to UK GDP – London Stock Exchange (LSE) and Hargreaves Lansdown (HL.) – as he does not want to make a bet on the economy. His other UK-listed holdings, like Shell and Unilever, all generate their revenues overseas.
Coombs outlines a number of reasons why Mark Carney and co should have held, with Brexit uncertainty top of the charts. “They shouldn’t raise rates until the Brexit negotiations complete. That could be five years down the road,” he says.
Other factors include planned higher spending on the NHS, which will require higher taxes, and the spectre of a potential Jeremy Corbyn Government, which will tax and spend on a level never seen in the UK before.
“Even the Treasury are saying there’s a slowdown because of Brexit, and yet somehow the Bank of England thinks this is a good time to tighten monetary policy at the same time – mental,” continues Coombs.
“All that uncertainty and we’ve got these economists sat in Threadneedle Street going ‘yeah, yeah, I think we should increase interest rates’. Get out of Threadneedle Street, go outside the M25, go and visit the North of England or North Wales and then decide if you want to raise interest rates.
“I just find this staggering. I think it’s just because, ‘well the US is raising rates and the Fed’s doing a good job so we should raise rates’. Next thing we know we’ll have the ECB raising rates – the would be even more stupid.”
Others have raised similar concerns, with Fidelity in particular calling it a “needless risk” before the decision was written in stone.
Once the ink had dried, Tom Stevenson, investment director for personal investing at Fidelity, added: “The central bank had very little choice but to act, otherwise it risked ruining what little credibility its forward guidance had left.
“However, in pressing forward with the rate hike, the Old Lady may have taken an unnecessary risk. Recent inflation data has been softer than expected and UK wage growth continues to remain subdued, suggesting that the UK economy may not be in as rude health as the BoE would like us to believe.
“On top of this, the UK economy continues to face significant headwinds from ongoing Brexit uncertainty as well as wider geo-political concerns.”
Sajiv Vaid, portfolio manager of the Morningstar Gold Rated Fidelity MoneyBuilder Income fund, stopped short of calling it a policy error. He noted that “the Bank indeed has some arguments on its side, even if tenuous”.
These include the recovery in GDP in the second quarter and a consistently string labour market. Still, he agreed with colleague Stevenson that it was “unnecessary”.
