As widely predicted, the Bank of England held interest rates at 0.75% in September. The announcement was accompanied by a statement that said, in the event the UK leaves the European Union without a deal at the end of October, interest rates could either go up or down. Rough translation: like everyone else, the BoE’s economic wizards haven’t got a clue (i.e. if in doubt, go sideways). The problem facing those at the controls is that of having to deal with the conflicting pressures of holding inflation in check, while stimulating growth in an economy under siege. In fairness, that’s going to be quite a balancing act.
However, the BoE did predict that the UK will record economic growth of 0.2% in Q3 2019 (thereby avoiding dipping into technical recession), but that ongoing uncertainty would lead to weaker growth in future which will likely mean that there will be no reason to raise interest rates in the short term. This is against the backdrop of interest rates dropping in the US and our currency being trashed even further against the dollar and Euro in the event of a no deal.
With all these ‘ifs, buts and maybes’, the picture remains as confused as ever. Meanwhile, national newspapers have been openly discussing the possibility of negative interest rates – where you are charged money for leaving money on deposit, but paid money to borrow. In this scenario, investors would genuinely be better off leaving their money under the mattress. What a thought!
To my mind, interest rates have always been a blunt instrument – the lower the rate, the blunter it becomes. Equally, increasing fiscal spending and investing in infrastructure as a way of stimulating the economy can lead to inflation if not accurately targeted. Whilst investing on the margin can be hugely beneficial, the trick is to know where the margin is – to date, I have not seen any convincing evidence that we know. You would have thought that, with all the money and effort going into ‘big data’ and Artificial Intelligence, we might be getting closer to the answer. Armed with that information we might be able to make such investments count.
