The interest rate yo-yo

By Meera Patel | 05 Sep, 2008 

In a widely expected move, the Bank of England’s Monetary Policy Committee has kept interest rates on hold once again at 5% this month. For much of this year the bank has struggled to combat inflation on the one hand and a recession on the other.

Raising rates would help curb inflation, but hurt the economy; lowering rates would boost the economy but feed inflation. We can safely say that BoE have had their hands firmly tied in this situation.

Our view is that inflation is not the problem that many seem to think. The oil price has come off its peak of $147 to currently $109. House prices are on the decline with two big lenders, Nationwide and Halifax, quoting falls in excess of 10% in the last year. The reality is this cannot be inflation when prices are falling in the wider economy.

We believe we need a cut in interest rates to help boost the economy. The government’s half hearted measure to offer a stamp duty holiday on properties up to the value of £175,000 for the next year is hardly going to be the solution. We therefore believe interest rates should start to fall by the end of this year and into 2009. This should offer some relief to home owners struggling with their mortgage payments and help kick start a flagging economy.

Above all, falling interest rates have historically proven beneficial to equity markets and corporate bonds, as witnessed in the last downturn. This should also offer some relief to patient investors who have stuck to their guns through this difficult period. In this environment, particular sectors that stand to do well are UK equity income and bonds. Please refer to our Wealth 150 list for a selection of our favoured funds in these sectors.