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Interest Rate Rise on Hold

Jack Turner, Research Analyst

This week we review the latest decision by the Bank of England with regard to interest rates and provide updates on economic news from the UK, EU and Argentina. We also provide highlight a portfolio action.

Interest Rate Rise on Hold

Weaker than expected economic data in 2018 to date has led to the Bank of England voting to keep interest rates at 0.5%, pushing back plans to raise rates until later in the year. The bank is confident that the period of slower growth is a temporary one, and as such seven of the nine members of the Monetary Policy Committee voted against a rise. Two members, however, vote to raise rates arguing that increasing wage packets on the back of the record low unemployment levels could lead to inflation which an immediate rate rise could prevent. Mark Carney, the bank’s governor, stated that an increase before the end of the year was more likely than not.


NEWS

UK
Retail sales plummeted 4.2% on a year-on-year basis in April, down from a 1.4% in March, and marking the largest fall since 2005. A consensus poll had forecast a 0.8% fall. The large fall was blamed on the timing of Easter and the unpredictable weather, and came despite the recent pick-up in the wage growth. The three-month average saw slight growth, rising 0.4% although household spending –which was 2% lower month-on-month, has now fallen for 11 of the previous 12 months and is on track for its worst annual performance in six years.

EUROZONE
François Villeroyde Galhau, the head of France’s central bank and the much anticipated successor of the European Central Bank’s President Mario Draghi caused the value of the Euro to increase as he stated that the region’s central bank was likely to end the bond buying programme by the end of the year and raise rates "at least some quarters, but not years" afterwards. He also believes that inflation will come through in the coming months as underlying process pressures increase and played down concerns about the GDP growth in Q1 2018.

ARGENTINA
The country has requested aid from the International Monetary Fund after a series of dramatic interest rate rises has failed to stop the slide in the value of its currency, the Peso. It is a dramatic turnaround from just last year when the government were selling 100-year bonds, joining a select club of countries with the confidence to borrow for such an extended period. While the history of eight defaults in the last 200 years appeared to have been forgotten by investors, inflation has not been as kind and hit 20% last year –the second highest in the region after Venezuela. In response, the central banks cut interest rates to 28%. This was taken badly by the markets and triggered the 20% sell off in the Peso.


PORTFOLIO ACTIONS

The team sold some of their holdings of global government bonds across the risk profiles, with the tactical asset allocation now standing at 8.5% of the value of the Balanced profile (as an example) instead of the 10% held previously.

The team used the proceeds to increase their holdings in global corporate bonds by 1.5% taking their allocation from 2% to 3.5%.

The recent rise in yields have made global corporate bonds more appealing, and robust global growth means the likelihood of this asset class defaulting is low. These reasons led the team to close the current underweight to the strategic asset allocation.


THREE ANNOUNCEMENTS DUE THIS WEEK

15 May –UK Unemployment Rate (Mar) // 17 May –EU Q1 2018 GDP Growth Rate // 17 May –US Jobless Claims (May)

SOURCES: BLOOMBERG, REUTERS, 7IM

 

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