Market Review
Ahead of the fourth quarter, the Bank of England (BoE) had increased the base interest rate in August and held it in September, so the market was split about whether further action would be required by the Monetary Policy Committee (MPC). Therefore, it was not a surprise when the BoE held rates at 5.25% for the entire fourth quarter. With the central bank pausing, and inflation continuing to fall during the period, investors have increasingly begun asking when rates will start to come down. One notable measure, the Bloomberg World Interest Rate Probability index, predicted rates to be 3.54% by December 2024 – but we believe this to be fanciful. At the meeting last December, two members of the MPC were still voting for rate hikes, so it is clear nothing is certain.
During the period, investors continued to monitor escalating tensions in the Middle East. On top of the clear humanitarian impact, this has the potential to disrupt freight patterns and raise oil prices, potentially arresting the decline of inflation.
Fund Activity
We made very few changes to the fund during the fourth quarter. Over this period the fund had to manage strategic outflows of around £5m and we used maturing holdings to fund these rather than make any unplanned sales or reposition the portfolio. With limited new issuance and a known funding requirement, there were few opportunities to extend the duration on the fund – but it remained stable as cash was taken out as the assets matured.
Outlook
Looking ahead, it appears most observers expect inflation to fall to 3% over the next few months. This would give confidence to rate setters and the public alike and allow banks to offer lower-priced mortgages. However, the BoE has also been clear about the importance of its 2% target so, even if 3% were reached, we expect the MPC to refrain from acting quickly. Instead, we would expect it to wait and see if inflation stayed at or below that level. We will likely need to wait until the summer before there are any rate cuts from the BoE.
This scenario, of course, depends on a few factors. The BoE will be watching the situation in the Middle East keenly, as well as domestic data such as employment levels and wage growth. Should inflation drop to near its 2% target, but the economy begins to tip into a technical recession, the MPC may be prompted to cut rates and stimulate the economy. Likewise, we will continue to reassess and look at any new numbers coming through as we move into a new stage of the economic cycle.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
Promotion approved 19/01/24
