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No rate rises next year: Managers turn dovish as data disappoints

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
28/10/2014

Leading fund managers have become more cautious about their expectations for interest rate hikes, with many now expecting any movement in base rates to be postponed until at least 2016.

Despite recent guidance from the Bank of England hinting rates could rise in Q1 next year, more and more investors are now pushing back their own internal forecasts following recent volatility and weak data.

Former Ignis bond fund manager Chris Bowie, who joined TwentyFour Asset Management this summer, said he does not now expect to see a rise in 2015.

He said: “Earlier this year I would have said there was a real possibility rates would rise in the first quarter of 2015, but that is becoming far less likely. I am sanguine on inflation and there is no wage growth, so an interest rate rise might not happen at all next year now.”

Bowie said the danger of another coalition government forming next year – something which is playing on the minds of many investors including M&G’s Jim Leaviss – would also push back rate hike expectations.

“If there is a coalition government, it would give no steer on the economy so it could hold companies back from making business decisions,” he said.

“However, if it is a majority win, then companies could continue with their capital expenditure plans, which would keep the economy strong and bring forward an interest rate rise,” he said.

Other managers, including Neil Woodford, agree. Woodford said earlier this year, when he launched his new firm, that interest rates would remain around record lows until 2017, as the economy remains lacklustre.

Martin Currie’s veteran investor Tom Walker agrees, expecting rate rises much later than the market.

Walker, the manager of Martin Currie’s Global Portfolio trust, said “on the balance of probabilities, there is a 40% chance rates will rise by the end of 2015 and a 60% chance they will not. Even if they do, they will not rise by much.”

He said curtailing stimulus packages that have helped economies recover from the huge shock of the financial crisis too soon would be a step backwards.

“Without wanting to sound bearish, central banks will be creating money for years to come,” he said.

“They spent a huge amount of effort on the recovery; why would they knock that on the head before the economy can stand on its own?”

Earlier this year, a survey by Capital Spreads found just 9% of investors thought rates would be held at 0.5% until 2016, having stood at a record low since March 2009.

The most recent minutes of the Monetary Policy Committee meeting showed the committee was still split 7-2 in favour of holding rates.

Martin Weale and Ian McCafferty both voted for a rise of 0.25%. However, the majority voted to hold them at record lows, with the minutes noting a loss of momentum from a number of key indicators such as the housing market, and surveys of business expectations.

While a somewhat crude measure, forward swap rates – which give an indication of the likely path for rates – have also come down in recent weeks as the investment climate becomes more troublesome.

One-year swap rates pushed out to 1.14% in July, implying the market expected rates to be around 1% by next summer, but they have since come back down, with the one-year rate for 22 October now back down to 0.79%.

Chart showing UK one-year swap rates over the past six months