Inflation and the Bank of England / Govt

ended 21. June 2022

On Wednesday morning at 07:00, the latest inflation data is being published. We're keen to get your views on Threadneedle Street's handling of inflation and what you are recommending clients (investors/savers/borrowers) do in the current climate. Please answer any or all of the following Qs (some are relevant to IFAs and wealth managers, others to brokers, some both):

  • Are the Bank of England and Government doing enough to combat inflation or are they helpless in the face of it?
  • Are rate rises the right thing, or the wrong thing, given the financial strain people and businesses are already under?
  • Could high inflation prove more protracted than the Bank of England is predicting?
  • What conversations are you having with clients (investors or borrowers) in the current climate, e.g. move into asset classes that have the potential to beat inflation / lock into the lowest mortgage rate possible for as long as possible?
  • Where should people be overweight in the current climate? Cash, bonds, equities?
  • Is there an argument that investors should de-diversify in the current climate, or does the age old adage of diversification still apply?
  • Could inflation see property prices go into reverse?
  • Exactly how bad could things get in your opinion, and why?

Any other thoughts, jot them down. Please keep your responses to 2-3 paragraphs MAX as we are likely to get a lot of responses to this alert.

6 responses from the Newspage community

Neither the Bank of England nor the Government seems to have a plan, strategy or coherent policy for the worst cost of living crisis facing Brits for more than a generation. Instead, we've got a Tory government saying one thing yet doing the opposite. They want to build a high-wage, high-skill, low-tax economy, seemingly forgetting they've been in charge for the past 12 years. Yet, at the same time, we've got one of the highest tax burdens since WW2, a skills gap, collapsing growth and declining living standards. If someone doesn't get a grip of this soon, we're in for a world of pain. The only thing going down is the money in people's pockets, yet we've got politicians and the governor of the Bank of England saying there must be wage restraint. It's difficult to know what level of reality they're operating in. Still, as we enter the 7th circle of hell, we can look forward to the inevitable environmental collapse, climate catastrophe and life-sustaining ecosystem breakdown, further exacerbating global warming, lowering our gas bills: every cloud and all that.
It's clear the main cause of skyrocketing prices is a massive overdose of money printing during the pandemic. The Ukraine war has, of course, made things significantly worse. It looks to me like all the central banks are slamming the breaks on, and inducing recessions because they know that's the only way to get runaway inflation back under control. They also need to protect their currencies with rate rises, as a falling currency makes imports more expensive. The Bank of England seems to be hoping that the already huge tax and price increases will bring inflation down swiftly, without resorting to large base rate hikes. If they're wrong, mortgages will become unaffordable and house prices could fall significantly.
It looks very likely at this stage that the Bank of England is going to trigger a recession, on purpose. This is why they are independent, so that rightly or wrongly they can do what they deem is required to stop inflation getting out of control. They will keep raising interest rates, which is bad news for people with mortgages, property investors and lots of businesses with commercial borrowing.
What conversations are you having with clients (investors or borrowers) in the current climate, e.g. move into asset classes that have the potential to beat inflation / lock into the lowest mortgage rate possible for as long as possible? The conversations currently with clients are all about their overall borrowing and what their plans are for the next few years as there is no point clients fixing for 5 years if they plan on moving later this year only to be hit with penalties but if the plans are to remain in their current home for the foreseeable fixing now for the foreseeable future is wise especially whilst mortgage rates currently keep moving like a rollercoaster. Are rate rises the right thing, or the wrong thing, given the financial strain people and businesses are already under? Any and all rate rises do have pros and cons but the bank of England seems determined to raise them to battle inflation. Could inflation see property prices go into reverse? Property prices are likely to hold without much growth for the next 12 months if inflation spirals out of control certain areas may see a reverse in prices where demand ain't as big and certain property types may also be effected if demand ain't as high such as apartments or flats.
“Businesses are undoubtedly feeling the squeeze, and in our recent survey, rising costs within supply chains and increased energy prices ranked as those having the most impact on businesses. The rising rate of inflation is only going to compound this issue and put our economic productivity at even greater risk. “There is little the Government can do to combat the rising rate of inflation short of increasing taxes and reducing spending, neither of which it is in a position to do. The Government should therefore be looking at other means of supporting businesses. There is a promise of measures to stimulate productivity in the upcoming Autumn Statement, but with the pace at which costs are currently increasing, support packages for businesses must be brought forward now. “Businesses face new challenges every day but my worry is that this is going to amplify the sense of caution in the business community. There’s no doubt that caution is necessary at the moment, but too much caution can stifle growth and thereby make an economic recession more likely. We are speaking to our customers daily to ensure we are giving them the right support. For many, their focus is ensuring they have sufficient working capital to balance the books. More long-term there is still appetite for asset finance and commercial lending, which indicates that many businesses are looking towards growth despite the challenges they are facing.”
Our clients tend to invest with horizons spanning over decades. The fact that inflation has risen sharply this year (after a once in a century pandemic combined with the war in Ukraine) does not change how we invest our client's money. Over the long term, if history is our guide, the only way to beat inflation is by investing in equities. This does involve getting through periods of high volatility like we are experiencing now, and if this is difficult we reduce the swings by adding bonds to the portfolios. We don't like to time the market or our client's allocations as it is extremely difficult to get the exit and re-entry points right. As long as we always remain diversified and rebalance periodically we will be on track. Cash remains useful for emergencies and for major purchases in the next five years but not longer term. For what it's worth, we believe this period of extremely high inflation is transitory and this time next year we could well be discussing deflation and cutting interest rates. The oil price is already falling as it starts to worry about a drop in demand. We think the outlook for the UK economy is quite bleak (perhaps more so than elsewhere in the world given the impact of Brexit, big tax rises and populist politics) and that's why we are always invested globally.