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Posted on: 18 July 2016

Following the appointment of Prime Minister May’s new Cabinet, all eyes turned this afternoon to The Bank of England’s Monetary Policy Committee (MPC) as it voted 8-1 to hold the UK's main interest rate at 0.5%, despite intense speculation it would cut rates. Here we examine what the status quo of UK monetary policy is likely to mean for investments, including the high profile class of commercial property, after the UK voted a fortnight ago to leave the EU.  

Interest rates remain at 0.5%

Although a surprise to some that interest rates are to remain unchanged- financial markets had priced in an 80% chance of the Bank cutting rates – the MPC chose to hold fire. 

The minutes of the meeting show that the MPC expect to loosen monetary policy at their next meeting in August, allowing them to get a better sense of the economic impact of the EU referendum result through the quarterly Inflation Report. The minutes support our conclusion that sterling investment markets have been orderly in the period since the result, and the UK’s uncertain outlook was appropriately reflected in the sharp lurch down in the exchange rate.

The Committee may also have been conscious of the political dimension to recent events. A quick resolution on the selection of a new Prime Minister in Theresa May, shows investors in sterling assets that the UK Government is on the front foot in forging its future.

The Bank of England's Governor, Mark Carney, and his fellow Committee members have deemed it too soon to comment on the economic impact of the vote to Brexit. The Royal Institution of Chartered Surveyors (RICS) reported that housing demand since the referendum has dropped at the fastest rate since 2008. In this context, it is important for the Bank of England to maintain its flexibility for the future. Keeping interest rates as they are allows for this.

Finally, we also believe that the Bank of England is likely to be holding off on a rate cut until the Bank of Japan and US Federal Reserve have their own monetary policy meetings. Since Ben Bernanke’s (economist and two term chairman of the US Federal Reserve) recent visit to Japan, there has been speculation that Japan may soon engage in a policy where a stimulus is applied directly to the economy. This could affect the prospect of any further incentives from the Bank of England. It is clear that coordination amongst the world’s largest central banks will continue as each navigates its own set of challenges. We expect markets to continue to exhibit significant volatility and maintain both our cautious view and diversified investment approach.

Commercial property

Following the UK’s decision to leave the EU, one sector that came under immediate scrutiny was commercial property.  Last week the press reported seven fund managers had suspended redemptions on their multi-billion pound commercial property open-ended investment funds. However, it has also been widely reported that industry experts have played down fears of a crash similar to the financial crisis of 2008/2009.  

Whilst risks in the property sector have obviously increased, this activity is related to declining sentiment rather than concrete evidence that commercial values are falling. The market is moving quickly to anticipate falls in property values and history teaches us it can be overzealous. 

The weakening of sterling could also prove an opportunity for international property investors, particularly those in the US, eager to take advantage of cheap deals which may only be available for a short period. 

Indeed earlier this week it was reported, US private equity firm Madison International Realty is preparing to spend more than £1bn on discounted UK real estate in the next six to 18 months, including buildings from a series of property funds that suspended trading last week. 

Speculation does remain over an exodus of firms from the City of London to EU-member countries, weakening demand for office space and hitting rents and capital values. At times like this it is important to retain a bias towards high quality assets – which Duncan Lawrie does – and to avoid high risk areas like City office space.   

With this new Cabinet in place, the UK’s negotiating position with the EU is an area politicians will seek to bolster, in order to remove uncertainties and give the sector more stability.


Long term planning

We are monitoring events closely and assessing the broader implications for markets economies. With our long-term prudent investment philosophy and active management approach, we will seek out investment opportunities resulting from any short-term volatility and will continuously review portfolio holdings and our asset allocation strategy.  

In a fortnight’s time we will recap on the winners and losers following the UK’s momentous decision to leave the EU. We will be video interviewing our Head of Research, James Humphreys, and look forward to bringing you the latest on our approach to managing investments post Brexit.      


All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.

The comments and figures in this document are generally applicable but you should always take specific advice to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.


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