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Investment View: Bull may have the legs to run and run

July’s inflation figures hardly supported the MPC’s decision to cut interest rates. The consumer price index hit an all-time high, with higher fuel costs are feeding through into the shopping basket.

Inflation is now at an eight-year high. A depressed housing market has also played its part in the figures. The headline retail price index, for example, was unchanged at 2.9 per cent, with the housing component counterbalancing the higher cost of oil. Both measures, though, are above targets set by the Chancellor, while there remains little evidence to support the belief that oil will retrace its rise in the near future.

Perhaps the most striking message from the publication of the minutes of the August MPC meeting was that governor Mervyn King had voted against reducing rates. Only five of the nine policymakers were behind the reduction from 4.75 per cent to 4.5 per cent. This is the first time the governor of the Bank of England has been in the minority. Among the arguments put forward by those not in favour of a rate cut was the fact that the UK economy was still operating close to capacity while most recent domestic economic indicators had been a little stronger than expected.

But the majority view reflected concerns over the slowdown in household spending and investment. The weak state of the housing market added weight to their argument while the labour market was perceived to be weakening. The possibility of a reversal of this decision was raised, though, with the minutes stating that the committee would not “preclude a rise in rates in the future if the data warranted.”

Following on from the previous week’s quarterly inflation report from the Bank of England, it all seemed to add up to a warning shot across the bows of this bull market. Yet, confidence continues to build, with support for the continued rally coming from buoyant company results and a benign global economic picture.

The positive cashflow experienced by institutions appears to be of equal importance, with the view that much of the rebalancing from equities to bonds must be consigned to history. A senior colleague of mine said: “This bull run is starting to look as though it has legs.” He even suggested it could have years rather than weeks to run, although last week shows markets do not move in a straight line.

Brian Tora is head of the intermediary division at Gerrard Investment Management

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