Neil Woodford: Interest rate rise not on the cards for next couple of years
Although the vast majority of economic forecasters expect the bank rate to remain at its all-time low of 0.25% this year, some commentators, including Kristin Forbes, a member of the Bank of England's nine-strong Monetary Policy Committee, suggest surging levels of inflation could lead to a hike in interest rates. For more on this read When will UK interest rates rise?
But Mr Woodford said predictions that inflation will surprise on the high side and soar up to 5% were "wide of the mark".
"Tightening policy will not happen either," added Mr Woodford. "In fact I would be willing to bet that Mark Carney (the Bank of England governor) will leave his position in 2019 having never increased interest rates. Quantitative easing may go, but rates are not going up."
Woodford said inflation will peak at around 3%, adding that longer term he is more concerned about the threat of deflation. The latest figures show UK inflation as measured by the Consumer Prices Index is 1.6%.
Turning his thoughts to the economy, Mr Woodford said he is not surprised GDP growth has not fallen off a cliff following last June's Brexit vote. Some commentators, particularly those who formed part of the 'remain' campaign, had predicted Britain's economy would fall into recession.
"There are challenges ahead. There's little in the way of wage growth, so there will be pressure on the consumer," said Mr Woodford.
If Mr Woodford's predictions that low interest rates are here to stay prove correct, it will deal a further blow for savers. Since rates were cut to 0.5% in March 2009, a record low at the time, savers have endured the worst returns on cash ever experienced.
For some of this period inflation has been high, with the consumer price index reaching 5.2% in September 2011.
Moneywise columnist Jeff Prestridge believes savers could be in for a better time in 2017.
This story was originally written for our sister magazine, Money Observer.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.