Investors, prepare now for trek towards normalised interest rates

As the Bank of England signals it will soon implement tighter monetary policy, investors should review their portfolios to ensure they successfully navigate increasing complexities, affirms the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The comments from deVere Group’s Nigel Green come as the UK’s central bank kept interest rates on hold on Thursday, defying market expectations that it would be the first of the world’s major central banks to hike rates following the pandemic.

The Bank of England decided to keep interest rates at an all-time low of 0.1%, rather than raise them to 0.25%, in a 7-to-2 vote.

Mr Green says: “After putting out hawkish signals recently, the Bank ultimately opted not to go for the interest rate hike that the markets had fully priced in, sending sterling falling to a one-month low.

“However, crucially, the BoE did leave the door open to the likelihood of raising rates ‘over coming months.’

“We believe this is the central bank’s way of prepping investors and households that inflation has become a concern and that growth has become slower due to supply side bottlenecks – and, therefore, to expect an interest rate hike as early as December.”

He continues: “Should this happen, stock and bond markets could correct sharply. Investors would be well-advised to stay in the market, but they should review their portfolios to ensure that they are properly diversified across asset class, sectors, regions and currencies.

“This will ensure they are best positioned to mitigate the downsides and seize opportunities arising from the likely volatility.

“The current scenario might normally drive investors to increase their exposure to fixed-income, but it’s almost universally agreed that stocks will continue to outperform bonds. There’s no real alternative at the moment.

“Plus, the growing inflation issue means cash will be eroded in a bank.”

The Bank of England has lifted its inflation forecast, and now sees consumer price inflation peaking around 5% next April, before dropping again. This is more than double its 2% target and an increase from the 3.1% in September.

The deVere CEO concludes: “This is the hardest time to be an investor and worst time not to be.

“There are real opportunities to be had, but navigating the territory is set to become more complex in coming months as we move towards a new era of interest rate normality driven partly by inflation fears.”