Yesterday saw the release of average earnings data which finally suggested that the squeeze on the British public has eased somewhat, posting an annual increase of 1.3%, above the current level of CPI at 1.2%. In further good news the rate of unemployment in the UK held at a 6 year low. Yesterday also saw the release of the Bank of England inflation report. Although curtailed slightly, expectations for economic growth remain strong, with forecasts of 3.5% this year, 2.9% in 2015 and 2.6% for the following two years.

With regard to inflation, however, the Bank was more dovish, forecasting that they expect CPI to hold around the 1% level for the next 12 months. The governor also conceded that he may need to write a letter to the chancellor at some point explain as to why the level of inflation had fallen below 1%. Key drivers to lower inflation were the fall in commodity prices, food price inflation at a 12 year low, the impact of a weaker sterling which had reduced CPI by c.0.75% and the weaker inflation outlook for major trade partners in Europe. Even when inflation does begin to rise as this weaker data washes through the Bank does not expect a sudden increase in inflation, only expecting a modest and incremental pick up back towards the 2% target level by the end of the three year forecast period.

A dig deeper into the report reveals the expected path for the base rate as implied by forward market interest rates. Here we see that the first rate rise in the UK is now not forecast until Q3 2015 and even then only a modest 25bp. Even after the first rise no sharp increases are expected, with small incremental increases forecast all the way out to the end of 2017. Even then the base rate is only expected to have reached the 1.7% level.

So what does this mean for us? Well for those borrowers out there this will be good news, with attractive and lower mortgage rates now potentially around for a little while longer yet. For those savers out there monies held in cash are unlikely to be yielding an attractive rate of return anytime soon.

Bond markets took the release of the report positively yesterday, with government bond yields falling across virtually all maturities. Unless we see growth significantly above forecast or an unexpected spike in inflation yields could be anchored for some time yet as a rotation out of bonds is put further back. Eyes will, of course, be heavily focussed across the Atlantic for clues, with the U.S. appearing much further on in their economic recovery.

With regard to equities more money in the hands of the public, particularly if they are willing to spend, can only be good news if it can filter through the higher revenues and earnings. Furthermore, if government and corporate bonds yields are to remain lower for longer, perhaps dividends represent a source of a higher level of income. With interest rates appearing unlikely to rise anytime soon, perhaps property can also enjoy a longer period of stronger returns. 

Stay diversified...