Interactive Investor

BoE emergency interest rate cut: How's the economy shaping up?

18th August 2017 11:44

Bill McQuaker from ii contributor

In August last year the Bank of England (BoE) made an emergency rate cut to 0.25% in the wake of the referendum result - but the reality is that the UK economy has held up better than many expected.

While GDP growth has slowed, consumer and business confidence has recovered from its post-referendum slump and unemployment has continued to fall.

Consumption has helped to support growth, enough for the BoE to begin unwinding the policy support that was put in place last summer, even if a definite tone of nervousness can still be detected.

There remain big questions around the direction of the UK economy in the coming years. Perhaps the biggest is whether manufacturing can exploit a much more competitive exchange rate.

This would help to make growth more sustainable and reduce the economy's dependence on consumer spending, which is coming under pressure from higher inflation and low to negative real wage growth.

The textbook case everyone looks at is 1992, when we saw a big pick-up in manufacturing. Following the financial crisis, however, some people have suggested that the UK's industrial base is no longer big enough to deliver a sizeable boost from currency depreciation.

While the UK's biggest export market, the eurozone, has improved considerably, manufacturing today faces challenges around supply chain uncertainty and the future impact of tariffs.

For the meantime, the BoE is looking to sit on the fence, emphasising that any adjustments to policy will be based on the data it sees in front of it. Some of the immediate measures taken last summer will be wound up, with the Bank's offer of cheap four-year funding to banks ending in February next year.

This is a reasonable approach, especially as they were stung by the economy's post-referendum strength.

Nevertheless, it's hard to see the BoE being part of the global wave of central banks tightening monetary policy like the Bank of Canada. From being at the front of the rate-raising pack two years ago, the BoE has dropped right to the back.

For investors, Brexit brings its own problems. If it becomes too painful to implement then the UK could either remain in the single market, or reverse its decision altogether.

This would be a strong positive for UK assets, especially sterling. Domestic equities could then re-rate, with consumers benefiting from a 'reverse-Brexit' appreciation of the pound pushing inflation down and real wages up.

Those with a negative view on UK assets should remain cogniscent of this risk.

We remain cautious on UK equities, but recently added a small amount to a UK value manager in one fund. UK equities have lagged their international counterparts but could catch up if we continue to see a strong rally in risk assets.

Conversely, if risk performs poorly then investors are more likely to take profits on positions which have done well and leave UK equities alone.

Bill McQuaker is portfolio manager of Fidelity's Multi Asset Open Range of funds.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

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