Black Swan Capital Wealth Management

The Bank of England's (BoE) Monetary Policy Committee (MPC) voted unanimously to keep interest rates at a record low of 0.5% and maintain its £125bn quantatitive easing programme.

Minutes of the MPC’s June meeting policymakers agreed the medium term outlook had not changed since their May forecasts but acknowledged there had been some encouraging news over the month which could gather momentum by boosting confidence.
"Overall, the risk of a continued sharp contraction in output in the near term had receded somewhat," the BoE minutes said.

"However, there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially since the Inflation Report had been finalised."

The BoE's key interest rate has been at 0.5% since early March. Economists had expected rates to stay at that level at least until the end of this year.

While the MPC said it was too early to assess the impact of quantatitive easing on nominal demand, it acknowledged there were some ‘tentative signs’ it was boosting the money holdings of institutional investors - the first step in the transmission mechanism.

James Hughes, chief investment officer at Black Swan Capital Wealth Management, there was an emerging case for a rate hike within the next few months.

He explained: “In spite of the unanimous vote by the MPC to keep the base rate at 0.5%, it was noted in the minutes that financial market sentiment has generally improved.

“The problem is that public debt in the UK is already soaring way past 50% of GDP and is expected to rise to perhaps 80% or even higher within the next five years. It is worth noting that Argentina defaulted on its sovereign debt once public debt reached 63% of GDP and that Russia defaulted at 75%. It would be truly disastrous if Britain also defaulted on its sovereign debt but the grim reality is that this is not out of the question.

“The only genuine alternative to raising rates is inflation. The MPC is likely to weigh up the pros and cons and implicitly vote to inflate away the public debt. Consequently, we do not expect to see a rate hike any time soon, although the MPC may become divided on the issue as recovery sets in.”