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Brian Tora: Loose monetary policy may store up nasty surprises

The Bank of England, the ECB and US Federal Reserve all committed to keeping interest rates low but when confidence returns we could see an inflationary spiral.


A more comfortable week for markets took place against the background of plenty of often contradictory news.

The Governor of the Bank of England changed the rules for forward guidance but then we had not really become used the policy of trying to indicate the direction of interest rates in advance. Scotland was warned – again – that monetary union with sterling was not a given if independence was the choice. And the new US Federal Reserve boss confirmed that future policy was unlikely to be very different to that under Mr Bernanke.

All very boring, but with a single theme, in terms of these snippets at least. It was all about monetary policy.

And it seems that speculation on how changes to monetary policy might affect economic progress will be one of the biggest influences on markets for the foreseeable future. Quite how this might play out in the short term is hard to determine, but I rather suspect that the financial landscape might look quite different in a year or two’s time.

Leaving aside the cross party unanimity that might see an independent Scotland seeking a currency of its own (how about bringing back the groat? This silver fourpence coin hasn’t been legal tender here since 1662), the universal message from central bankers on interest rates seems to be lower for longer. Mark Carney’s decision to renege on the fall in the unemployment rate as the trigger for raising rates suggests he doesn’t really trust the numbers.

Similarly, Mario Draghi, over at the European Central Bank, indicated that further rate cuts remained an option, particularly if the spectre of deflation raises its ugly head. And while tapering might drive interest rates up in those countries suffering from the repatriation of US money, there is no sign of rates rising in the US for some time yet. Cheap money is around, but not in such plentiful quantities.

What worries me in all this is that when the change finally comes, it will be swift and dramatic. So far governments and central banks have engineered a de-gearing that has maintained relative calm while reducing living standards, yet avoided social upsets. Once confidence that the global economy is back on an even keel, delivering sustainable growth, I rather suspect that whole populations will start to demand a bigger share of the cake.

This could trigger the inflationary spiral that many believed a natural consequence of quantitative easing. Interest rates will have to rise then – and perhaps significantly. But so far there is no sign of this taking place – at least in the developed economies there isn’t. We seem to be in a two speed world right now, with the tortoise and the hare having swapped places – not the easiest environment in which to reach sensible investment decisions.

Looking back in time to try to seek guidance from what has gone before only reinforces the view that this time is rather different. Never before have we seen technology change both working practices and society quite so rapidly. Never in the past has there needed to be such co-operation between nation states. Perhaps the ideal economic manager today should be more of a tactician than a strategist. Even that thought causes me concern.

The message must be for investors to stay nimble. With luck we will ride the uncertainty that the current and projected changes bring about without a major upset. Indeed, perhaps the really good news is that the future has seldom appeared as opaque as at present. And uncertainty can create opportunity. I overheard someone remarking that for $1.5trn you could buy every quoted mining company in the world, or three businesses the size of Apple. It puts the extent of the change we have seen into context, really.

Brian Tora is an Associate with investment managers JM Finn & Co


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