The central banks of countries like the Bank of England have the ability to impact the performance of your investments like no other.
Just one decision by the Bank of England can mean the difference between a positive year for your investments or a negative year in terms of performance.
Here’s what you should be aware of.
What The Bank of England does
Economist John Maynard Keynes apparently once said… “If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.”
Ultimately, the main job of the Bank of England is to ensure financial security for the UK. To ensure the UK’s financial system works.
It does this by….
- Controlling how much physical cash is in the system.
- Keeping an eye on UK banks and their financial resilience to any economic impacts.
- Keeping the rise in prices (inflation) to an acceptable level.
I have recently finished watching a two part documentary called ‘Inside The Bank Of England’ that is now available on BBCiPlayer. I thoroughly recommend it if you would like to see how the Bank of England works, especially the build up to an interest rate decision and the potential economic impacts of Brexit. It’s an easy watch, nothing too technical.
Why has the Bank of England become so important
Since the Global Financial crisis of 2007-2009 the Bank of England along with other central banks have been linked to the performance of your investments like never before.
Since the financial crisis, the Bank of England has been releasing large sums of cash into the financial system and has reduced interest rates to record lows. This policy has been credited with saving the UK from a very long and painful recession.
But now it is like life support for the economy. Turn the money off and raise interest rates and the economy might just break. Well that’s the theory anyway.
Now, usually interest rates will only rise when inflation is getting high. This is because demand is outstripping supply and the economy is overheating. In order to reduce demand the Bank of England will raise interest rates, making borrowing more expensive and therefore the access to money not so easy.
Interest rates may also rise to prop up a currency. The higher the interest rates in the UK, the more chance foreign investors will buy UK assets and therefore require more pounds which pushes the price of the pound up.
In the current climate with growth in the UK and other countries around the world struggling to stay positive, the stock markets have come to expect low interest rates and welcome cuts. Any reduction in interest rates is likely to give stock markets a boost in the short term.
However, with all that new money in the system since 2008 high inflation could be lurking around the corner. At this point the Bank of England could be stuck between a rock and a hard place.
If you are worried about what to do next with your investments please get in touch so we can carry out a full review for you. The investment portfolios we recommend are built to deliver your financial plan and to withstand the economic shocks that will always come along.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.