Halfway through 2023, and we have moved on from worrying about small Californian banks to the rather more homespun problem of mortgage rates over 6%.  The Bank of England is giving the unfortunate impression of being in a muddle and still following events rather than being on top of them.

It is still really all about inflation.  The UK inflation rate (on the CPI measure, RPI is too appalling to contemplate) is still close to 9%, while we have just had the latest US consumer prices figure at 3%, oh dear.  The Gilt and fixed interest markets have taken fright with the inflation figures and interest rates have gone up for all time periods (i.e., capital values have fallen).  In turn, this has undermined the UK equity market.

We are now into one of those unusual periods when short-term interest rates are higher than long-term rates.  These periods are normally followed by an economic slowdown as the high level of mortgage and other borrowing costs deters activity, not necessarily a recession but this is quite likely.  The better news is that these periods tend not to last for long.

With the Bank of England on the defensive and seemingly adopting a bunker mentality, base rates appear likely to go higher yet, and this is what the Bank has been warning.  The better news for investors is that this is now reflected in market prices, though I can readily see that that is cold comfort to those facing ever higher mortgage payments.

The other side of the rather depressing backdrop, not to mention its presentation in the news, is that the investment landscape has been transformed over the past six months, most noticeably for those seeking income.  The move in the Gilt market has taken interest rates back to levels not seen for a long time.  I think it is not too strong to call it a generational shift, with the Gilt and fixed interest markets looking so much more attractive now.

There is no doubt that these markets require patience, the returns on offer are not likely to show through in portfolios until we can see some improvement in our inflation outlook.  But much of this is anticipated in current prices and it will be too late by the time the media catches up.  I wish that the Bank of England could also exercise some patience and check to see how much damage they have done already before pushing rates to extremes, but I rather doubt they will.
 

The full Quarterly Review is available here. 

July 2023

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