With the Bank of England (BoE) and the Federal Reserve set to raise interest rates, the question of timings is a pressing issue for fund firms.
Anna Stupnytska, global economist at Fidelity Worldwide, says lower inflation and a strong pound are reasons for the UK to keep rates low for the time being.
However, Mark Carney, the BoE governor, has said that inflation falling back to zero would not prevent rate hikes.
Stupnytska says: “I believe the BoE will want to at least see inflation heading in the direction of the target, rather than away from it, before they will be comfortable in hiking rates.”
As for the Fed, Ian Pizer, head of investment strategy for Aviva Investors’ multi-strategy fund range, says it would be a mistake not to raise rates soon.
Pizer says that while there is a risk of longer-term interest rates rising significantly in the US, both the domestic economy and riskier asset classes should be able to withstand a hike.
However, he also says that a surge in rates could hit investor confidence sufficiently to negatively affect risk assets. This could see capital outflows in emerging nations drive down their asset prices and make their currencies weaker against the dollar.
“We view such an event as unlikely, though, unless the Fed is pressed into tightening more aggressively due to a sharper rise in US inflation than is currently anticipated,” says Pizer.
What is likely, according to Stupnytska, is that the Fed will hike rates first, followed by the BoE in the first half of 2016.
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