Nick Dixon, Investment Director at Aegon comments on the Bank of England interest rate decision: “Two factors have driven today’s rate increase. First inflation is stubbornly above the Bank’s 2% target, and secondly wage pressure is adding to future inflation expectations.
“Looking forward two factors will be critical in determining future interest rates. First the final Brexit trade deal will impact the level of sterling and hence inflation. Second is the labour market and whether wage pressures intensify, especially in the public sector, become embedded and strengthen inflationary trends. If sterling depreciates and wage increases lead to higher prices, there will be pressure for interest rates to rise higher and faster than markets currently expect."
Steve Webb, Director of Policy at Royal London said:‘In general, any rise in mortgage costs would be expected to give employees less money to put into their pension. However, given that many mortgages are now on fixed rates, it may be some years before most workers see any increase in their mortgage costs. At the same time, one of the reasons for the rate rise is the improving outlook for real wages. This is far more important for workers’ confidence than gradual increases in mortgage costs. The improving prospects for wage growth increases the chance that the April 2019 increase in contribution rates will again be comfortably absorbed by employees’
‘We have already seen company pension schemes reducing their deficit figures in anticipation of rising interest rates, and today’s announcement is likely to reinforce that trend. Combined with downward revisions on life expectancy, the trend in pension fund deficits is likely to continue in a downward direction’.
Jignesh Sheth, Head of Strategy at JLT Employee Benefits, said: “Today’s 0.25% increase in the Bank of England Base Rate was widely expected following the Monetary Policy Committee’s (MPC) previous comments and vote. Wages have been increasing and the recent decision to break the cap on public sector pay rises will add further upwards pressure. Reading between the lines, concerns around productivity growth point to the need to manage inflation carefully despite low levels of growth.
“Market pricing suggests further rate rises, at around 0.25% per year over the next three years. This is consistent with the MPC’s June comments that ‘any future increases in the Bank Rate are likely to be at a gradual pace and to a limited extent’.
“We largely agree with this expectation, particularly over the short to medium term, although believe markets are pricing rates too low for the long-term.
“For defined benefit pension schemes, we do not expect today’s increase to have a significant impact on longer term rates (gilt yields). However, this rate rise will help to support the value of Sterling which has been under pressure in the light of increased Brexit uncertainty. The FTSE 100, which is highly sensitive to the value of Sterling due to its constituents’ overseas earnings, has been moving in the opposite direction to Sterling and therefore this rate increase may temper any upward movement in the short term.”
Matthew Harrison, Managing Director, Lincoln Pensions said: “Today’s decision by the MPC to raise interest rates again was widely expected and had been priced into the market for some time. As such, we expect that this decision will result in only a limited improvement in pension scheme deficits.
“With concerns growing over the potential impact of Brexit and escalating trade wars, we expect many trustees will be more focussed on building an integrated understanding of the impact of key risks on both their sponsor and their investment strategy, and taking steps to manage dangerous correlations between the two.”
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