“After seven years, and almost 90 meetings of policy inaction, today’s interest rate decision from the Bank of England was always going to make investors sit up right. Markets were pricing in a 80% chance of a rate cut, following a revealing speech by governor Mark Carney last week, stating that the Brexit result meant a deteriorated outlook for the British Economy and that ‘some monetary policy easing will likely be required over the summer’.
“When Carney took to the podium, uncertainty clouded the outlook. Britain was leaderless and the Brexit decision had cast a long shadow over the British economy. The Bank of England governor had to do what central bank governors are supposed to: provide some soothing words to calm frayed investor nerves. However, with a new prime minister and cabinet in place, political uncertainty has abated and the Bank of England has wisely decided to keep its powder dry for now.
“As we have seen in Japan and Europe, monetary policy can only go so far and then you need the government to step up to the plate by financially stimulating the economy. The course for the new chancellor Philip Hammond is clear: it’s time to wave good-bye to the age of austerity and usher in an era of lower taxes and government spending. This effectively means increasing the rate of growth of public debt - a marked u-turn from former chancellor George Osborne’s plan of paying off the nation’s credit card. More debt might sound undesirable, after all we’re hardwired to dislike debt, but total debt matters much less than the affordability of that debt. And currently with the lowest interest rates that we have ever seen, Britain’s debt is cheap.
“Savers and investors looking for a decent return on their investments, may need to move money further up the risk spectrum, investing in equities or the slightly more risky bonds issued by companies rather than governments. It also means the rules of retirement are changing. The sooner you can start to save into a pension the better – lower for longer returns mean you will need the benefit of time and compounding to build up a decently sized pot. Those nearing retirement will also need to rethink their pension planning. Traditionally, as you moved closer to pension age you would de-risk your retirement portfolio by moving assets from equities into less risky bonds to preserve wealth. However, with the income from bonds hovering near zero or below, there may be merit in sticking with higher returning equities for longer.
“For anyone who is unsure about the benefits of investing in the stock market our calculations show that if you had invested £15,000 into the FTSE All Share index 10 years ago you would now be left with £25,323. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £15,976. That’s a difference of £9,347* – far too big for anyone to ignore.”
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