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Impact of New Govt on Bank of England
One of the first things Gordon Brown did as Chancellor when Labour came to power in 1997 was to make the Bank of England independent and gave them sole responsibility for the setting of UK Bank Base Rate.
In order to then give the Bank of England guidance as to what the purpose of the setting of interest rates was Gordon Brown provided them with a target of managing interest rates in order to achieve an inflation target of 2% (+/-1%) as measured by the Consumer Prices Index.
With a general election coming up and looking at the polls it seems reasonable to assume that whatever happens Labour will not be in majority power after the general election and at best will be working in conjunction with one or more of the other minority parties. It is reasonable to speculate on that there may well be a change in government and we could see George Osborne as Chancellor of the Exchequer.
Whilst no one believes that a Conservative government would reverse the policy of making the Bank of England independent this means that the Monetary Policy Committee will continue to set bank interest rates. What is not clear, however, is what a Conservative government would give the Bank of England as a purpose for the setting of interest rates. Will they still wish to maintain an inflation target of 2% all they look for some other measure such as the control of the money supply or indeed a different measure inflation or a different inflation target?
These changes could have a bearing on the way markets are currently looking at their expectations for interest rate rises - the markets seem to be factoring in an interest rate rise of up to 0.5% by the end of the current calendar year so that we could see base rates of 1% if the current forecasts in the fixed interest markets turn out to be correct.
Within its current anticipation the markets do not appear to have given much thought as to what impact of a change in government may have with regards to general monetary and fiscal policy and how this might impact on the mandate given to the Bank of England in setting Interest Rates.
All this, in our view, provides further confusion for investors in the fixed interest markets and supports our previous decision to recommend growth investors withdraw from fixed interest investments.
There is no doubt that the current run-up to the general election is a more interesting one than we have seen for a number of years as there is no clear front runner in the polls.
Interestingly, Margaret Thatcher did not have a significant majority in the polls prior to her landslide victory in 1979 and this was on the back of what had become a very weak Labour government and the so-called Winter of Discontent.
The thing we know about politics is that it is, at best, unpredictable!
In order to then give the Bank of England guidance as to what the purpose of the setting of interest rates was Gordon Brown provided them with a target of managing interest rates in order to achieve an inflation target of 2% (+/-1%) as measured by the Consumer Prices Index.
With a general election coming up and looking at the polls it seems reasonable to assume that whatever happens Labour will not be in majority power after the general election and at best will be working in conjunction with one or more of the other minority parties. It is reasonable to speculate on that there may well be a change in government and we could see George Osborne as Chancellor of the Exchequer.
Whilst no one believes that a Conservative government would reverse the policy of making the Bank of England independent this means that the Monetary Policy Committee will continue to set bank interest rates. What is not clear, however, is what a Conservative government would give the Bank of England as a purpose for the setting of interest rates. Will they still wish to maintain an inflation target of 2% all they look for some other measure such as the control of the money supply or indeed a different measure inflation or a different inflation target?
These changes could have a bearing on the way markets are currently looking at their expectations for interest rate rises - the markets seem to be factoring in an interest rate rise of up to 0.5% by the end of the current calendar year so that we could see base rates of 1% if the current forecasts in the fixed interest markets turn out to be correct.
Within its current anticipation the markets do not appear to have given much thought as to what impact of a change in government may have with regards to general monetary and fiscal policy and how this might impact on the mandate given to the Bank of England in setting Interest Rates.
All this, in our view, provides further confusion for investors in the fixed interest markets and supports our previous decision to recommend growth investors withdraw from fixed interest investments.
There is no doubt that the current run-up to the general election is a more interesting one than we have seen for a number of years as there is no clear front runner in the polls.
Interestingly, Margaret Thatcher did not have a significant majority in the polls prior to her landslide victory in 1979 and this was on the back of what had become a very weak Labour government and the so-called Winter of Discontent.
The thing we know about politics is that it is, at best, unpredictable!
