Budget and rates

We won’t dwell too long on Wednesday’s budget, as every paper and financial journal will be doing that. The budget did appear to address some fundamentally important areas of the economy, introducing measures to assist manufacturing, savers and pensioners. The Chancellor was able to announce these new proposals whilst quoting the Office for Budget Responsibility-improving view on the outlook for the UK economy. Growth for 2014 is now expected to be 2.7%; average earnings will rise faster than prices by the end of the year, and the UK economy is expected to have a budget surplus by 2018/2019. 

The proposal that will probably attract the most headlines in tomorrow’s newspaper was the reform of annuities. Those who wish to will now be able to take their money upon retirement and invest or spend it as they wish, as they are longer forced to buy an annuity. Unsurprisingly, the major listed insurance companies, who have been able to benefit for years from the annuity scheme, got hit by the announcement. I am sure there will be other consequences for the financial services industry from this announcement. 

UK equities fell following the budget announcement. In our view, this fall was not so much a reaction to the budget itself, but more on the comments that accompanied the budget regarding the economic outlook. Investors will once again start to push forward the day when they expect rates will rise in the UK. 

In the US, the Fed once again tapered its bond purchase program by another $10bn. What took the market more by surprise was a statement that accompanied the announcement. Continuing the policy of forward guidance, in theory to allow the market to prepare itself for the first interest rate move, the Fed announced that they expect the first rate rise 6 months after the quantitative easing program finishes. This would mean the first US rate rise would come approximately this time next year. Equity market fell and yields on US treasuries rose. 

The normalisation of interest rates is a natural consequence of the fact that the economic outlook is improving and should be welcomed. As we have said before this normalisation process is likely to cause some volatility in equity and bond markets whilst they adjust.

Posted on March 20, 2014 .