Super Thursday not only saw the Bank of England’s latest decision on interest rates and QE, but also their latest inflation report too.
November's Super Thursday was all about the inflation report, whereas the previous Super Thursday in August was all about the policy decision. In August the Bank reacted to the EU Referendum result and cut the Base Rate, which was widely expected, but also restarted Quantitative Easing, which was largely a surprise. For pension schemes the QE news is more significant in many ways as it focusses more towards longer dated assets and joins a number of other central banks globally hoovering up an ever greater percentage of safe assets. This global policy fundamentally pushes up liabilities for pension schemes; an issue trustees and sponsors are all too aware of already.
"Carney has reiterated that the Bank was willing to 'look through' short term inflation effects, but there was a limit to how much inflation they could accept. Unsurprisingly he was quiet on just how much."
But what was the focus this time? The headlines were all around the changes the Bank made to its inflation and UK growth forecasts. The Bank has altered its forecasts significantly over the past three months as growth has held up better than expected. This is generally a positive for assets and sponsor covenants alike, and led the Bank to increase its near term GDP forecasts; albeit they reduced their longer term ones.
Inflation is reacting to the substantial fall in Sterling that has occurred over the past 12 months. This has led some to ask if the Bank will have to raise rates to bring inflation back under control. We have been here before, in 2010/11 following the 30% fall in Sterling in 2009. At that time the Bank, under the previous governor, kept rates unaltered and so focussing on growth rather than purely inflation. Mark Carney has reiterated that the Bank was willing to 'look through' short term inflation effects, but there was a limit to how much inflation they could accept. Unsurprisingly he was quiet on just how much.
As if Thursday wasn’t 'super' enough we have also had the latest stage in the Brexit discussions with the High Court ruling that Parliament has sovereignty over the government in terms of triggering Article 50. Sterling rose on receipt of this news, highlighting the only limited role Carney has to play in shaping markets. Fiscal policy, via the Autumn Statement later this month, may well be another such example.
These movements reaffirm the challenge pension schemes, and all savers alike, have been grappling with over the past seven years. Negative real yields (interest rates lower than inflation) looks set to remain for many years to come.