As the Bank prepares to release its quarterly inflation report, here’s what investors should look out for and what it will mean for investment portfolios.
On Thursday February 2nd the Bank of England will hold its first policy meeting of 2017.
Here’s what property and global investors need to know – and which assets are likely to be most exposed to the Bank’s announcements:
What is the Bank of England policy meeting?
Some commentators have dubbed it “Super Thursday”. That’s because the Bank of England will, on Thursday February 2nd, collectively present its interest-rate decision, quarterly inflation report, meeting minutes and press conference.
This will be the third opportunity since last summer’s Brexit vote that Governor Mark Carney and his fellow policy makers will have had to revise inflation and economic growth forecasts.
What’s happened at recent policy meetings that investors have had to contend with?
June’s referendum resulted prompted the Bank to significantly reduce GDP forecasts in the short and mid-term.
But Britain’s economy has demonstrated strong resilience in the months since. At November’s meeting, the Bank then had to revise its growth predictions for 2017, upgrading it to 1.4% from 0.8%.
The Brexit vote did, however, trigger a sharp decline in the value of sterling. Inflation rose to 1.6% and, in November, the Bank then predicted inflation would hit 2.7% in 2017.
What’s likely to happen this time?
The National Institute for Economic and Social Research (NIESR) believes that only the US will experience faster economic growth in this calendar year out of all the G7 nations than the UK. So it’s likely the Bank will revise its own growth projections at the meeting.
Inflation is also expected to surpass initial Bank of England predictions. In a note from analysts, HSBC expects the Bank to lift the 2017 inflation forecast to 2.8%.
What does this mean for property and global investors?
Ordinarily, rising inflation and a strong economic outlook would normally lead to a rise in interest rates.
But it’s expected that the Bank will, instead, revise the data and hold off on any immediate rise in the base rate.
That’s because, at November’s meeting, Mr Carney not only suggested that rates are just as likely to be cut as they are raised, but also outlined that the central view of the Bank is that it won’t be for another two years that interest rates are likely to be uplifted.
He said: “While we see the Monetary Policy Committee willing, for now, to ‘look through’ the transitory inflation overshoot and lingering Brexit-related risks, our central view is that bank rate will not rise until late-2019.”
Property, gold, equities, bonds: What assets might be affected by this policy meeting?
If no major change in monetary policy is announced, then most investors shouldn’t need to make any immediate changes to their investment strategy.
But rising inflation levels should concern anyone heavily vested in bonds.
Gilts are often a go-to asset in a low-interest rate environment for many investors.
But 2016 saw yields from UK government bonds fluctuate wildly, and there’s little to suggest that this volatility will cease in 2017.
What’s more, bond prices are determined by future inflation levels. If, as expected, the Bank raises its inflation level outlook for the year, it will be gilt investors that might need to take action more than those with other assets.
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