UK investors expect 2016 rate rise despite BoE dovishness

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Two in five UK investors think the Bank of England will raise interest rates this year, despite comments last week by Bank of England governor Mark Carney that there was room to cut interest rates to zero.

In mid-March the Bank of England announced it hoped to return inflation to its target of 2 per cent within two years, but said its monetary policy committee had voted unanimously to keep interest rates at their record low of 0.5 per cent.

According to Legg Mason’s 2016 Global Investment Study, 40 per cent of UK investors expect to see rate rises in the next year. Six per cent expect it to rise in the next six months and 33 per cent expect it to rise in six months to a year.

Another 41 per cent  of investors expect 2017 will be the year the UK’s interest rates will rise.

However, looking to Europe, 74 per cent of investors expect a rise to take place next year at the earliest. Nine per cent of French and Italian investors said they expect a rate rise will never come, a possibility that wasn’t found in the UK data.

The US began moves to normalise interest rates at the end of 2015, even hinting there may be four more rises in 2016.

At the time of Legg Mason’s survey in December and January there was speculation that the UK may follow suit; however, in the intervening period the US Federal Reserve has said growth would be markedly less than forecast in its December meeting.

This year the Legg Mason research introduced the perspective of millennial investors for the first time, with only 28 per cent expecting hikes in interest rates from the Bank of England this year.

Millennials were twice as likely as investors aged 40-plus to fear negative impacts from an interest rate rise, with 77 per cent saying they expected it would derail the UK’s economic recovery, compared to 38 per cent from the older age group.

Commenting on low interest rates, Adam Gent, head of UK sales at Legg Mason, says: “In such an environment, income-producing risk assets remain pivotal for many UK investors, and we see nothing on the immediate horizon that will dampen their enthusiasm for investments that produce a decent real yield.”