The Bank of England released its latest inflation report on Thursday, and although Mark Carney agrees that the fall in the oil price may strengthen economic growth this year, he believes that in the short term inflation could fall further and on that basis could entertain the idea of a further rate cut. It does seem remarkable that last year when the nation was clearly not strong enough to weather a rise in rates, the Bank of England debated the idea, and this year when households are in a far better shape to withstand a modest rate rise due to the fall in commodity prices, they suggest the idea of a cut. It does however go to underline the point how determined central bankers are to ensure they do whatever is needed to support an economic recovery.
Members of the Bank of England Monetary Policy Committee must pour over reams of economic data in coming to these views, and one feels at the end of it they risk getting caught by being unable to see the wood for the trees.
We argued long and hard last year against the case for a rate rise, and still see this year that there is no fundamental case for a rate rise in the coming months in the UK or the US. Ultimately a rise in rates should be seen as good news, it would be a vindication of all the measures that central bankers have put into place to stimulate the global economy. When rates do start to rise, there is no doubt in our minds it will be reactive, and the fears that many have that the bankers will be behind the curve therefore rates will move faster than expected will be founded. Mark Carney's comments today reinforce that view.
Wednesday evening carried press reports that an agreement with Greece had been reached, and Thursday morning was met with no agreement and that discussions would resume on Monday. Both reports were met by complete indifference from equity investors, as was the news that a cease-fire has been agreed in the Ukraine. The 28th of February is the date by which an agreement has to be reached, as it’s the date when the current EU-IMF bailout agreement comes to an end. If history has taught us anything, assuming an agreement will be found, negotiations will go the wire before it is finalised.
As equity markets grind higher those who doubt the merits of equities over bonds at this point should take heed from Switzerland where major corporations can fund themselves at negative rates and offer dividend yields of circa 3%.