Rate hikes loom into view

AFTER 25 years of the Inflation Report, it is time to call a truce on Bank of England forecasting. It is too easy to pillory governor Mark Carney for frequently tweaking forecasts when the purpose of the report and regular press conferences is to update citizens.

The process is so much better now than when the chancellor and governor would cook up interest rate changes behind closed doors, acting on hunches and political expediency.

It is hard to argue with the Bank’s latest forecasts. Synchronised recovery in much of the world, together with Britain’s more competitive exchange rate, has created a better climate for manufacturing and exporting. This is reflected in recent surveys from the Brexit-unfriendly CBI.

If the US is any guide, as the jobless rate ratchets down and Brexit fears put downward pressure on immigration, wage settlements are expected to perk up and outpace inflation. The inevitable consequence is that interest rates in the UK will rise earlier and faster than previously expected.

That is what the currency and bond markets are now predicting. The pound jumped 1pc against the dollar in latest trading to $1.40 and surged against the euro. Yields on British Government bonds also climbed.

The Bank’s higher growth forecast in each of the next three years makes a number of assumptions.

It hopes for a relatively pain-free Brexit and that the current turmoil on share markets doesn’t throw a spanner in the works. Volatile and falling stock markets militate against investment.

The view at the Bank now is that, with inflation still well above the 2pc target and climbing fuel prices complicating the future, the bank rate will be raised by at least 0.25 of a percentage point in May to 0.75pc, and will keep on rising.

The prospect already is having an impact on UK share markets. It should be less alarming in Britain than across the Atlantic, as the FTSE100 has been less ebullient than tech and banking-driven US indexes.

As interest rates normalise, the age of the super-cheap tracker mortgage may be coming to an end and the case for new borrowers getting a fix will have strengthened.

There are seven times more savings accounts than mortgage borrowers, and they can begin, after ten years of deprivation, to look towards better cash returns.

As importantly, higher gilt yields could take pressure off pension funds. That should be no excuse for boards to ignore responsibility for shortfalls and make higher dividends and executive pay a priority.

Trading chaos

THE sudden realisation by equity markets that the tide is changing for interest rates is an example of trading naivety and the herd instinct. Anyone listening to the pronouncements of central banks late last year will have recognised the tide turning and not piled into shares in early January.

What is shocking about recent seesawing equity markets is how the fundamentals – earnings and payout trends to investors – have been swamped by complexity.

As veteran US fund manager Leon Cooperman noted this week, behind the bonkers movements in the key indexes were instruments most ordinary investors have never heard of. The obscure Velocity Shares Daily Inverse VIX index plunged 93pc in Tuesday trading just 24 hours after another velocity index climbed by 115.6pc.

So, as at the start of the financial crisis, derivative products of which we know little have gone haywire, damaging savers’ prospects around the world.

The big question is: where were the Wall Street and Chicago regulators when these destabilising, high-leveraged (borrowed products) were being created?

Once again, ordinary investors have been exposed to the Wild West and no one has a clue where it ends.

Speaking up

SIR Charles Dunstone and Talk Talk hoped to obliterate the negative impact of a profits warning with the promise of a big investment in superfast broadband, to be funded in part by a £200m rights issue.

What was not fully explained was that the shares, representing 19.9pc of the capital, had been placed directly in the market, depriving a large body of shareholders of the right to own some. That provoked fury from The Investment Association.

Time now for public anger about fat-cattery at Persimmon.