16 September 2016

Interest Rates At A Record Low

Events in politics and markets over the last few months would have been diffi cult to predict at the start of the year

Events in politics and markets over the last few months would have been diffi cult to predict at the start of the year. The latest development from the Governor of the Bank of England, to cut interest rates to one-quarter of a percentage point, is without historic precedent in the UK. The near 15% fall in the value of the Pound since the Referendum has acted as a shock absorber for the UK economy but it will result in an increase in prices for imported goods. If we do not see a drop in economic activity this imported inflation may require interest rates to rise to counteract it. For credibility’s sake the Governor’s hand was forced but I would question whether the evidence yet supports the action.

Stockmarkets have been supported by the fall in the currency which has had a positive effect on UK exporting companies and our overseas investments. Domestic companies have suffered, bringing some weight to the Bank of England’s argument for cutting rates. The MPC are looking at figures from events prior to the Referendum where activity certainly stalled. My suspicion is that it has actually picked up since. One obvious catalyst is the increased value on offer in the UK. As an example, if you are a property investor from the Far East with significant assets already in London and you are looking to invest more, it is likely that a combination of sterling weakness and vendor discounting has created a 25% reduction in local currency terms in the properties that you might be considering purchasing.

Interest rates today are at one-quarter of a percentage point, which translates into zero returns for clients’ cash on deposit. In several European countries cash on deposit is receiving negative returns and I am concerned that if Mark Carney was to act again that the same could happen in the UK. In that environment banks would charge us to place cash on deposit. Were this to happen we would be in the unfortunate position of having to pass on those charges to our clients, which is why, I think, equity markets are going up at the moment – money is being invested to get a return.

There are very few places that one can go to achieve a return on a relatively safe basis and for that investment to be readily realisable. Where appropriate, there are a number of short-dated corporate bond funds that I have invested in on behalf of clients, where the managers focus on the shorter end of the yield curve and, with a reasonable spread of these, returns are around 3% at present. It is important to note, these are not a substitute for cash where cash is awaiting investment, but if one is looking to achieve a reasonable return on money sitting on deposit, then these medium-risk investments could offer some value if one is prepared to move cash from the low risk, low return environment of a bank account.

We are well aware that investment returns after all fees and charges are uppermost in the thoughts of our clients, so it is a daunting prospect to have to pass any charge for cash on deposit the bank levies onto our clients. If and when this happens we will try to minimise these charges and look to invest your cash in suitable investments subject to your individual requirements. The good news is that we can offer potential solutions for clients frustrated at the paucity of returns on their cash in the bank.

James Edgedale
Chairman, JM Finn & Co

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