Posted on Thursday 18 June 2015 by Ulster Business

Year end interest rate hike possible

Jonathan Dobbin, Head of Barclays Wealth and Investment Management, Northern Ireland, left and Henk Potts, Director, Global Research & Investments, Barclays Wealth and Investment Management 

There’s growing potential for a UK interest rate rise at the end of this year, according to Barclays Wealth and Investment Management.

Its London-based strategist Henk Potts said the Bank of England’s expectation of steadily increasing inflation in the latter half of 2015 will put the central bank under pressure to raise rates from the current all-time low level of 0.5%.

But he said there’s little chance of a sharp hike in rates, rather a tempered increase with rates remaining well below historical levels in the medium term.

“The UK economy has gone from the sick man of Europe to one of the fastest growing in the western world,” Mr Potts, Director of Global Investment Strategy for Barclays Wealth and Investment Management,  told clients of the bank at a breakfast in the Merchant Hotel in Belfast. “It’s looking in good shape and that puts pressure on the Bank of England to raise interest rates.”

He said the central bank’s use of higher interest rates to keep a cap on rising prices could come into play if the inflation rate follows its projections of heading higher for the remainder of this year.

Looking at where investors should put their money, he said the bullish tone from the US should spread.

 “We see the US economy as capable of digesting higher interest rates and suspect that the US’s continued economic warmth will spread, with varying lags, to the rest of the world. Our favoured developed equity regions remain for the moment the US and Europe, excluding the UK, with the global growth backdrop equally important for the latter as the more subdued, but unevenly improving domestic backdrop. “

He expected bond markets to eventually run up against headwinds.

“Of the big sovereign markets, we think the euro area can continue to relatively outperform in what we still think will be a testing time for most bonds: we expect recent gains will eventually be reversed. A reappraisal of the path of interest rates in the US and UK by the bond market could see a temporary reduction in global risk appetite, which could see spreads to riskier fixed income instruments widen from here. We suggest keeping duration short”.

 When it comes to foreign exchange, Mr Potts expects US dollar strength.

“We continue to favour USD and expect it to outperform most other G10 currencies in 2015 as monetary conditions in the US and euro zone continue to diverge. We remain cautious on emerging market FX and the EUR, though the still strong consensus on the latter suggests some circumspection is merited. News on Greece, one way or the other, will clearly continue to be influential”. 

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