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BoE rate rise is no surprise 


Colin Morton, vice president, portfolio manager, Franklin UK Equity Income Fund and Franklin UK Rising Dividends Fund, comments in the Bank of Englands decision to raise interest rates…

With this interest rate rise, the Bank of England (BoE) has reversed an emergency measure put in place post Brexit that perhaps ended up being unnecessary, given that the expected recessionary environment and jump in unemployment has not materialised. Mark Carney’s creditability was on the line and today’s decision sidestepped any danger of him being accused of ‘crying wolf’ for a second time if no action was taken. Against that backdrop, today’s increase comes as no surprise. The vote was not unanimous, so it will be interesting to see how the BoE progresses from here.
 
Markets have already priced in the decision so we shouldn’t see any notable impact on stock prices in the short term, even though we are in the very unusual circumstance of a rate rise being implemented amidst relatively little GDP growth.
 
This increase is likely to be part of a slow process of incremental rate rises over the next couple of years. We can expect the Bank to raise the rate once or twice more next year, perhaps up to 1 per cent, and towards 1.5 per cent by the end of 2019. This would still keep rates at historically low levels, but raising them any quicker would be unsustainable and risk quashing any future growth in the economy.”
  
This continuation of the low interest rate environment is positive for equities, which are going through the longest bull market since the recession of 2008/2009. By contrast, 10 year bond yields are still at extremely low levels, and opportunities are lacking in most alternatives.
 
Beyond interest rates, political uncertainties remain the major concern for investors in the UK to contend with. The lack of clarity surrounding Brexit and the UK Government’s instability are making it hard for companies to make investment decisions. In our view, there needs to be stronger assurances of continuity on a macro level over the next few years before we can change from being reasonably defensive in building portfolios. Despite this uncertainty, we are still finding opportunities in individual companies.

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