UK Interest Rates & The Impact on DB Pensions

In the UK, interest rates have been kept at 0.25% by the Monetary Policy Committee. Nonetheless, the fall of the pound and the ongoing inflation means the MPC had to discuss a 0.25% rise, bringing interest rates to 0.5% by the end of this year.

Whilst acknowledging that five votes are needed to pass the decision of raising rates, 3 members from the 8 voted in favour of a change which did not include Bank’s Governor Mark Carney who appeared to be more worried about a the slowing of consumer spending, rising household prices and the UK’s dismal wage growth.

Moreover the more inflation there is, the more likely members of the Committee will vote in favour of an increase as this has currently dented the overall growth of the UK and all of its advanced European neighbours.

In May, inflation rose higher than the target 2% limit established by the Bank of England as it hit 2.9% this was mainly driven in part by the pound’s weakness since the Brexit vote which has in turn made imports to the UK more expensive.

Impact on the Pound

The potential for the Bank of England or BOE rate rise will help the pound get back on his feet but since the decision has yet to be made it will have a negative impact in the short term.

Currently the sterling is not performing or showing its dominance against the USD, Euro and New Zealand Dollar and if interest or exchange rates are not altered and regulated according to the present market then borrowing prices go up along with the interest rate, then the investments decrease which reduces prices making exchanges easier and cheaper resulting in a rise of the pound’s power against foreign currencies. For the time being, the pound is 14% lower than the US dollar when compared to before the Brexit announcement of 2016.

Impact UK stock market (FTSE 100)

Overall, a low powered pound is benefitting the FTSE 100, up by 18% from 2016, nonetheless, several big companies are not profiting from the downfall of the sterling, in fact, multinationals investing and making money overseas lost more than others since each transaction costs.

An increase of interest rates will empower the pound which will benefit the companies listed in the FTSE 100, their buying power will grow and so will their investments.

Impact on your Defined Benefit Pension

Quite simply, if the interest rate goes higher your DB Pension or Final Salary Pension valuation could potential decrease substantially, so now would be a good time to get a current valuation, which I can do free of charge.

See my article on DB Schemes and the huge under-funding that may affect your retirement and contact me directly if you would like more information and know your options.

 

All the Best

Stuart

CEO

Farringdon Group

+60 3 2026 0286

Week 26 in Review: Eurozone Sentiment near 10-year High

 

Central bankers sing more hawkish tune

US Q1 GDP revised up

Eurozone economic sentiment soars

Brazil’s president faces corruption charges

Venezuelan crisis intensifies

 

Global equities fell modestly this week amid speculation concerning Europe scaling back monetary stimulus. Yields rose on the talk, with the 10-year Treasury note ending the week at 2.29%, up from 2.15% a week ago. Oil prices recovered some of their recent losses, rising to $45.40 from $42.65 last Friday. Volatility, as measured by the Chicago Board Options Exchange Volatility Index, ticked up to 10.9 from 10.6.

GLOBAL MACRO NEWS

Easy money epoch at an end?

Markets turned turbulent this week after a series of hawkish comments from developed-market central bankers suggested the era of ultra-loose monetary policy may be nearing its end. European Central Bank president Mario Draghi’s speech on Tuesday to a gathering of central bankers in Portugal was read as suggesting that the ECB is considering curbing its asset-buying program. The ECB pushed back on that interpretation, but the market refused to be spun. European bond yields rose sharply, as did the euro on foreign exchange markets. Bank of England governor Mark Carney, after saying only a week ago that now is not the time to raise interest rates, reversed course and said the Monetary Policy Committee will debate a rate move in the next few months. Not to be outdone, US Federal Reserve chair Janet Yellen and Vice Chair Stanley Fischer both voiced concerns that equity and other asset valuations are on the rich side, which suggests that financial stability worries could keep the Fed on a tightening path, despite easing US inflation pressures.

Despite the somewhat more hawkish tone, inflation pressures remain extremely muted, except in the United Kingdom, where currency pass-through is boosting prices. To illustrate this point, the eurozone reported on Friday that consumer prices rose only 1.3% in June versus a year ago, down from 1.4% in May. That’s well below the ECB’s near-2% target.

US growth revised higher to start year
US economic growth in the hard-to-measure first quarter of the year was revised higher for a second time on Thursday. Gross domestic product expanded at a 1.4% annual rate, the US Bureau of Economic Analysis reported. That’s up from the 1.2% reading in the last revision. Improved consumer spending was the main driver of the revision, the BEA said. The initial Q1 reading, released in April, was a particularly anemic 0.7%.

Eurozone confidence near a 10-year high
The eurozone economic sentiment indicator (ESI) jumped to a nearly 10-year high of 111.1 in June from 109.2 in May, with optimism on display in all sectors of the economy, according to a report by the European Commission. The ESI reached 111.8 in August 2007, just before the global financial crisis began to intensify.

Temer charged with corruption

Brazilian president Michel Temer was formally charged this week with receiving bribes totaling $152,000. The charges come less than a year after he took office, in the wake of the impeachment of Dilma Rousseff. Temer is the first sitting president of the country to be charged with a crime. In addition to the bribery count, the president may also face obstruction of justice charges, according to press reports.

Venezuelan crisis takes bizarre turn
A stolen police helicopter strafed and dropped grenades on Venezuela’s Supreme Court and Interior Ministry headquarters this week as protests against President Nicolas Maduro intensified. Some categorize the attack as an attempted coup against Maduro’s government, while others say the incident was staged by his supporters. The political tumult comes against the backdrop of a deepening economic crisis fueled by runaway inflation, food shortages and falling government revenues stemming from weak oil prices.

Have a great week ahead

All the Best

Stuart

CEO

Farringdon Group

+60 3 2026 0286