By Tom Stevenson, investment director for Personal Investing at Fidelity International:
All eyes this week have been on today's Bank of England 'Super Thursday' announcement and today's decision shows that the Old Lady of Threadneedle Street isn't quite ready to push the button yet.
The vote at the end of this week's two-day meeting was carried by 6-2, one hawk fewer than the 5-3 vote at the last meeting in June, one dove fewer than the 7-1 split in May at the last quarterly Super Thursday meeting.
It seems the bank is reluctant to rock the economic recovery by hiking rates just yet and the Bank's view on growth has also been downgraded since the May meeting. Three months ago, the Bank expected GDP to rise by 1.9% in 2017, 1.7% in 2018 and 1.8% in 2019. This time, the equivalent forecasts are 1.7%, 1.6% and 1.8%. What's driving that sluggish growth is the other key figure in today's smorgasbord of data – inflation. While growth is running a bit cooler than expected, inflation is a bit hotter in the near term and safely above the Bank's 2% target. And that is squeezing consumers' spending power because household earnings are not keeping pace with prices. Again, the Bank has tweaked its expectations on inflation. Three months ago, it was looking for prices to rise by 2.6% this year, by 2.6% in 2018 and 2.2% in 2019. Today's forecasts are respectively 2.7%, 2.6% and 2.2%.
So what do today's announcements mean for investors? More of the same really. It is hard to see interest rates rising very far, very fast in the current sluggish environment. And with no pressure from other central banks – the US, Europe and Japan are also loath to tighten prematurely – we should expect the Bank to remain on its lower-for-longer trajectory. I would be surprised to see any hike at all this year. Even when last year's quarter point cut to 0.25% is reversed, I would caution against assuming that the Bank is setting off on a more determined tightening path.
At the risk of sounding like a cracked record, cash remains trash in today's environment. With this in mind, anyone with savings still sitting in cash will continue to struggle to generate a real return. If anyone is still unsure about the benefits of investing in stocks and shares over saving in cash then our calculations show that if you had invested £15,000 into the FTSE All Share index over the past ten years you would now be left with £25,270. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £15,691*. That's a difference of £9,579 – too big for any sensible saver to ignore."
*Source: Fidelity International, August 2017 – figures as at 30.06.2017