Markets move, rates on hold – CIO Talk Today

Markets are reacting to global uncertainty as the Bank of England holds interest rates at 3.75%. We explain what’s behind the decision and why a long‑term, diversified approach remains important.

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Transcript

SPEAKER_00 0:07

Chief Investment Officer Gary Reynolds has just come off the airwaves. Well, somebody else has been on the airwaves, so do we say the Bank of England. Gary, what's happening?

SPEAKER_01 0:15

They're holding rates, Leah. So rates are gonna be stuck at 3.75%. That wasn't a surprise. What was a surprise to me was that that was a unanimous decision. Every member of the Monetary Policy Committee, all nine of them, voted to hold the rate at 3.75. Why is that a surprise? Because last time, um, beginning of February, four voted to reduce the rate to 3.5, four voted to keep it at 3.75, and the chair, Andrew Bailey, the governor, had the swing vote and he voted to keep it as it was. Now, their arguments, I've had a quick look through the minutes, their arguments are obviously based around the shock to the economy through the increase in oil prices emanating from the Middle East disputes. What I don't get is that that is a shock to the economy, more likely to be a shock to growth, as opposed to being necessarily inflationary. But I think the Monetary Policy Committee is so nervous about being accused of treating a shock as transitory, which they did in 2022, when we had the energy shock through Russia's invasion of Ukraine, that they don't want to get caught out again when inflation went through 10% very quickly.

SPEAKER_00 1:43

So are they basically all agreeing that they're going to do nothing right now?

SPEAKER_01 1:46

They're all going to do nothing right now. And I think that's uh personally, I think that's a mistake. I think the economy needs to get some help with with growing, it's slowing down. We saw that through the poor growth figures from the first quarter of um last quarter of last year. Um, and I think also when you look at unemployment, that's up to 5.2% now. If you look at the low point in 2022, unemployment was just below 1.3 million. Now it's nearly 1.9 million. So we have sort of added an extra 600,000 unemployed people in the economy. Um, so that's not an economy that's overheating. And there's a and the output gap, the estimated difference between what we produce and what we can produce is negative, meaning we've got capacity. So, on a variety of measures, I think they could have reduced the rate today to 3.5%. But they they who am I? I'm not on the MPC, they chose not to, fine. But that's probably the difficult difference between a bureaucrat and a business owner.

SPEAKER_00 2:55

So remind us how often these announcements are made.

SPEAKER_01 2:58

Well, they're they're not quite monthly anymore. Um, they used to be every month, but they're more intermittent now, if it'd be eight a year. So that's um that's enough. You know, they don't need to be that frequent and they tend to follow a trend similar to the to the Fed, i.e., the in the central bank in the US in making these these pronouncements. But I was a bit disappointed that the four uh members that voted for the reduction uh last month uh um didn't vote for it this time.

SPEAKER_00 3:28

I do recall James suggesting that the split in the voting suggests that there's disharmony um in the Bank of England in among the committee. Um so this isn't really a sign that they are all aligning with each another. It's more, as we say, they're just not going to do anything at the moment.

SPEAKER_01 3:47

Yeah, I think that's that's a fair point. Although I've sort of been a bit critical, in their defence, they are tasked with keeping inf uh by hitting their they're tasked with hitting the inflation rate target, which is 2% per annum in the UK. In the states, the Fed is tasked with looking after the economy and keeping unemployment down as well as hitting their inflation target. So so perhaps you know it is a it is a bit daft, and I think we failed to evolve the independence of our Bank of England uh on a to match the Fed, where we say, right, hit the inflation target, but it's got consequences across the board, and there needs to be more joined up thinking. Going back to what is the likely cause of this? It is the cause of it, yeah. Okay, let's be clear, it is the cause of it.

SPEAKER_00 4:41

Sure. Um Middle East conflict. Last time we spoke, you said it was not in anybody's interest for this to carry on. Well, it doesn't look like it's slowed down at all. If anything, it's escalated.

SPEAKER_01 4:53

Oh, I think that I think the protagonists are trying to position themselves to have some form of exit. Um the Iranians are still shipping through the Strait of Hormuz, but they're threatening to hit other people's ships if they try to ship through there, which means they've got an income stream coming through from selling oil and other people haven't. The Americans and the Israelis will want to make sure the Iranians have some pain if they're going to stop shipping going through. So one assumes what they've what they've just done is threatened to hit infrastructure, the Iranians' actual oil infrastructure now. The US. Or the Israelis have hit some installations. Trump has said that he didn't know they were going to do it. It was it was not he wasn't targeting the anchor installations themselves, but the Americans will certainly threaten to do so if the Iranians hit shipping. Now I still maintain this is in no one's interest for this to continue. There's no there's no one's invaded somebody else's country. This is not like Ukraine-Russia, where the Ukrainians were not going to give in. This is an interest here which says, do you know, guys, we better get this, we better we need to sort things out and get this oil flowing. And I think whilst the Americans would like a regime change, um, they can't guarantee it without moving in and putting putting troops in. But they have sent, I think, 2,500 Marines down to the Middle East, and the assumption there is that what they may do is send troops in to take over um Kagh Island, which is where most of the Iranian oil is shipped from. So there are sorts of possibilities with this, but still the logical thing for everybody to do is to try and try and dial this down and find some sort of exit.

SPEAKER_00 6:44

Of course, we'll bring some relevance to this on our own turf. How have the funds been holding up?

SPEAKER_01 6:50

Well, they've been doing okay. I mean, I'd rather this wasn't happening because it's been happening all year, hasn't it, really, since you know the beginning of the year. It has in a way. I mean, you know, we the last major wobble we had was April 2025 when Trump introduced his his um tariffs. And that caused the markets to sell off quite significantly. The markets have sold off um because of the oil because of the oil threat, because the you know, there's a chance that it hits margins because companies pass their increased cost of energy onto their customers. That's inflationary. It's stopped the Bank of England cutting rates, which everybody thought they would do this much. So that's not great for markets, but we it we're doing okay, you know. We'd it's it's I'd rather this wasn't happening, but we're we're we're doing all right. It's just that if when you looked at the figures from the funds up to the end of February, they were stellar. Um, they're not quite stellar now, but then it it you know, it's it's it's it's the it's the point you take. And you know, as a fund manager, you know you're gonna have to deal with these types of episodes. And I have said time and time again that when you hit them, you want to hit them with good diversification and holding decent assets, and then you can get through the other side. We've hit it with good diversification and decent assets.

SPEAKER_00 8:16

Yeah, and if you need to r respond in any way, you're already too late, isn't it? Because these things, when you see these things happen, it's too late. It's too late, yeah. Yeah. Well, one thing that I can confirm with certainty that you were right about in our last chat is that asahi zero is nice.

SPEAKER_01 8:33

You've been trying it, yeah.

SPEAKER_00 8:34

Yeah. Well done. There's another one I must say. Um, I'm not going to advertise it, but there's there's another one that's just come out. It's more of an ale. Um, really good. Yeah, I mean But that's not an Asahi product.

SPEAKER_01 8:44

It's not, it's do we own it. It's rebellion. It's rebellion, is it? Oh well, they're great local business rebellion. Beer is very good. But that asah, I'm glad you like the asahi, but it is uh it's a very good. So anybody listening to this, you know, and even if you don't take alcohol, you've got non-alcoholic beers to choose from. And uh, if you're drinking asahi, you're putting some money back in your own pocket.

SPEAKER_00 9:08

Gary, thanks very much. We're gonna jump on and get this out, and I'll look forward to catching up with you again soon. Thank you, Dave. All right, any questions, please do speak to your advisor or contact us via the website. Thanks,