Investment experts warn of future uncertainty as UK inflation rates decrease

Nicholas Earl, 20/06/2019

Inflation rates on the Consumer Prices Index (CPI) decreased to 2.0 percent this month, after steadily rising over the past six months since January. The decline has been attributed to a fall in air fares and car prices by the Office for National Statistics. The figure is in line with the Bank of England’s target, making it unlikely that the governor Mark Carney will raise inflation rates.

Senior figures across the investment sector have responded to the news, and have pointed to the uncertainty surrounding Brexit as the key issue for the future of the UK’s inflation rates.

Phil Smeaton, chief investment officer at Sanlam UK believed that despite the decrease in inflation rates this month, the market was still vulnerable to economic shocks from developing situations both domestically and internationally. He cited tensions in the Middle East, the ongoing US/China trade conflict and the possibly of a no-deal Brexit as particular challenges for managing inflation rates.

He said: “The Brexit conundrum now battles with the Tory leadership contest for the front pages, but it’s important to remember that a no-deal scenario rises in probability the closer we get to the Halloween deadline. Global uncertainty also continues to ramp up, with US/ China trade talks still unresolved and increasing tensions in the Middle East. These factors, along with a weakened Sterling prompted by the slow fragmentation of the UK government, combine to increase inflationary pressures."

Although Mr Smeaton did not expect the Bank of England to intervene in the immediate future, he did suggest that the UK’s economy was potentially volatile.

He added: “Despite all this uncertainty, UK inflation continues to be well supported – at least for now. But concerns remain that the UK’s economic strength is finely balanced. While inflation remains stable the Bank of England will stay on the side-lines, but if it ticks back up, Carney may be forced to intervene. While the strong performance of the UK economy suggests that an interest rate rise could be sustained if it’s deemed necessary, the lack of clarity on Brexit dramatically increases the risks of such a move.”

Following the release of the UK’s CPI figures Alessandro Capuano, global head of brokerage and business development at Fineco Bank also offered his thoughts on the situation. He believed that uncertainty continued to influence inflation rates and also pointed to the potential effect of the Conservative Party leadership contest on the state of the markets.

He said: “Despite the slight rise in last month’s CPI figures, today’s fall down to two percent is a symptom of the uncertainty plaguing the British economy. The latest figures prompt fresh speculation over whether the Bank of England’s Monetary Policy Committee will raise interest rates this year. Interest rates will need to increase soon to keep inflation in check. However, mired by Brexit difficulties, the Bank of England’s hands are tied, and it is unlikely the BOE will act on interest rates. For now, all eyes in the markets will be on any Brexit-related developments, particularly those related to the Tory party leadership contest.”

Thomas Wells, manager of the Smith & Williamson Global-Inflation Linked Bond Fund said the slight downturn in inflation rates was not a surprise.

He said: “As expected, CPI inflation has softened a little from its recent level. The post-Brexit bounce in manufacturing activity is well and truly over, and evidence suggests that consumers are – quite understandably – being careful when it comes to ‘big ticket’ purchases. Car registrations, for example, have continued to tumble year on year and we think there could be more pain to come here.”

Mr Wells believes that the key period for the UK markets will be later this year, and that the outcome of Brexit remained a significant issue.

“The acid test for the UK though will come in October and early November. If there is no deal, some forecasts suggest that sterling could fall by 15 percent, and the outcome could be worse than that if GBP slips its anchor due to capital outflows. That would lead to a material uptick in inflation and inflation expectations – it is important to remember that the UK runs a large trade deficit with the rest of world and a currency depreciation of that magnitude would be extremely painful for consumers due to a sharp rise in the cost of imports.”

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