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What is the outlook for UK interest rates?

19 November 2018 | Markets and Economy

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Leo Schulz
Prospects for U.K. interest rates. 

My name is Leo Schulz, and I have with me Alexis Gray, Senior Economist at Vanguard Europe.  Alexis, we are in an environment of rising interest rates, but the underlying picture feels very mixed. 

Alex Gray: I think that is right.  On one hand, if you look at the labour market in the U.K., the unemployment rate has actually fallen to the lowest level since the mid-1970s, which is great news.  Equally, the economy is not growing very quickly, we have had a few soft patches recently and I think that that is related to the uncertainty associated with Brexit and perhaps some other factors, like weather, but the negotiations for Brexit have been taking place for some time and we see households and firms still unclear about what the relationship will be between the U.K. and the E.U., so we have seen sort of sluggish performance overall. 

Leo Schulz: You mentioned unemployment being as low as it has been since the 1970s, why is that not having more of an impact on the economy?

Alex Gray: Well, it has been unusual the extent to which unemployment has fallen and yet we have not seen wage pressures or inflation building as you normally would see.  Typically, when firms run out of new workers to hire, they have to pay more  to attract people, but what has happened recently, I think, is we have seen a deterioration in the quality of jobs, so some people might say, ‘yes, I have a job, but I am only working half as many hours as I would like’.  We’re talking about part-time and temporary contracts.  

Leo Schulz: Why then, if we’re going through this softer patch, if employment is not having the effect on wages that it might have had in previous times, why are interest rates rising at all?

Alex Gray: Well, the labour market still is quite tight and inflation is, in fact, above the 2% target that the Bank of England is trying to achieve, so that still warrants some concern in their eyes, and they feel it is time to be gradually raising rates. 

Leo Schulz: Alexis, we’re kind of naturally inclined to fear rising interest rates, it hits our mortgages and cost of capital and so on, but there are benefits to rising interest rates as well. 

Alex Gray: Yes, I mean, from the perspective of a saver or a retiree, for example, as interest rates rise, the income stream from cash and bonds will increase, so that is good news for them.  I also think it is a positive signal that we’re no longer in an emergency, we don’t want interest rates to be at zero in perpetuity. 

Leo Schulz: Interest rates are rising, we have near full employment, inflation is higher than the Bank of England would like it to be.  At the same time, Brexit negotiations remain uncertain.  Higher interest rates will, however, benefit savers. 

Alexis Gray, thank you very much. 

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Other important information:

This video is directed at professional investors in the UK only and should not be distributed to, or relied upon by retail investors.

It is for educational purposes only.

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The opinions expressed in this video are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

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