As Abi Oladimeji, Thomas Miller Investment chief investment officer, said: “Post-referendum, the UK faces a lengthy period of uncertainty. In the shorter term, this will result in lower investment and consumption. The severity of the short term impact will depend on the extent of the response from the Bank of England.
“As things stand, the risks of a UK recession at some point over the next year are finely balanced. In this context, the MPC’s decision to cut interest rates is a step in the right direction but it seems likely that further policy support will be required in due course.”
Asset balloon
The other way to look at Thursday’s developments however is as another gust of hot air into already inflated asset prices.
“A heroic attempt by the BoE to make some of the most expensive asset classes in the world even more expensive,” is how Dan Kemp, chief investment officer EMEA, Morningstar Investment Management described the impact of the move, especially in relation to bond prices.
“All it is really going to do is bring forward future returns to the present,” he said in a video on Morningstar’s website, adding “We hate to see investors pay too much for returns and really we are just seeing an encouragement of that from the Bank of England.”
Which in and of itself is a problem for the longer term, but becomes more concerning when one adds to that worries that monetary bazookas like the one’s the BoE fired on Thursday are not guaranteed to work.
QE bazooka
As Rathbones asset allocation strategist, Ed Smith, said of the bank’s ‘QE bazooka’: “As with previous QE programmes, we expect today’s measures to benefit asset price inflation more than economic inflation.
“So as long as it doesn’t flame latent fears about central banks running low on ammunition, it should put a floor under business and consumer confidence. Yet it’s difficult to say with any confidence that the policy announcements will arrest a fall in borrowing and spending.”
Paras Anand, head of European Equities at Fidelity International, agreed, adding: “The timing is interesting, not in the context of recent economic data in the UK, but more because there is a genuine debate whether such action will revive the economy at this point or lead to a further ebb in confidence.”
He added: “In other economies around the world, a fight to the death over inflation has meant that this has become a semi-permanent state of the world as confidence drains. While the Bank of England are clearly focused on challenges at home, there are lessons abroad that need heeding.”
While it is clear that Carney feels he has heeded those lessons, he has also raised the stakes in the ongoing game of hunt for yield investors are playing.
Like ill-fitting clothes there is a mismatch between the risk involved and the reward one gets and, it feels like, as a tailor, the central banks are now running out of thread.
