The recent interest rate decision by the Bank of England sought to bring inflation under control and today’s figures underline both the importance and timeliness of that decision. With inflation at 3%, retail sales stagnating, and wage growth slower than inflation, increased rates will help provide some economic balance.
These increases are likely to exceed market expectations, given the limited prospects of the Government to raise additional revenue though higher taxes, but should be implemented both slowly and prudently to avoid potential destabilising effects.
In this changing market environment, richly priced asset classes may start to return to fair value, and a more defensive approach may well be prudent.
Nick Dixon is investment director at Aegon