The Future for Interest Rates Joe Scott-Soane jscottsoane@arlingclose.com

Fears that the Monetary Policy Committee would cut the Bank Rate into negative territory were put to rest when they met last week and decided to maintain the Bank Rate at 0.1% as well as leaving the current Quantitative Easing target at £895 billion. Through its consultation with the Prudential Regulation Authority, the MPC concluded that businesses were not ready to implement negative rates at this stage but did tell the PRA to prepare to help them prepare for negative rates within the next six months.

Nonetheless, the MPC made it clear that this was not a signal that negative rates were imminent or even on the horizon. In fact, with the way things stand, it looks less and less likely that we will see them implemented. Although the MPC revised their earlier forecasts to include a slightly larger dip in GDP due to the most recent lockdown measures, their forecast remains very optimistic with GDP reaching its pre-Covid level by end of 2021/early 2022.

Although lockdown measures combined with Brexit woes have hampered activity in the UK over the last year, the expectation is that if the rollout of vaccinations continues at the impressive pace the UK has been managing so far, there will be a significant rebound once lockdown measures are lifted. If this proves to be the case, despite firms’ readiness for negative rates, it is unlikely that we will see the MPC implement them without a drastic change in the current trajectory.

Just because we are unlikely to see interest rates fall below zero does not mean that the MPC is in any rush to push rates up either. One of the key takeaways from last week’s meeting was that the MPC said it is not likely to increase the bank rate until it has achieved its 2% inflation target, which could still be a way off. If we use the Bank of England’s forecast, we may not see inflation creep back up to 2% until 2022, and even then the projections are subject to a lot of uncertainty.

Two areas that have suffered (and continue to suffer) because of the prolonged low interest rate environment are Gilt yields and Money Market Fund yields. As the central bank rate is a key factor in determining bond yields, the lower for longer forecast combined with poor inflation expectations could see the shorter-term yields remain at low levels until the global economy begins to recover. These low yields feed into the near zero returns that we have seen on MMFs which have been forced to waive fees across the board to maintain positive yields and preserve investor’s capital.

As yields are not expected to rise particularly quickly in the near-term, investors have begun to consider alternatives such as Cash Plus funds and Short-Dated Bond funds which offer similar liquidity levels to MMFs but with increased yields, provided investors are happy to lock out cash for slightly longer duration.

If you would like to discuss potential alternative investment options for this low interest rate environment, please get in touch with the Arlingclose team by emailing treasury@arlingclose.com.