Carney happy to accept inflation overshoot
Potent cocktail of rising inflation and low interest rates to hit pensioners
Carney happy to accept inflation overshoot - Russ Mould, investment director at AJ Bell:
“While Governor Carney will doubtless be relieved to see too much inflation rather than too little, he is now on alert for too high an overshoot, suggesting he may not be displeased by today’s rebound in the pound, which could help limit inflation and remove any need to consider an interest rate hike.
“Mr Carney has warned before that the UK is dependent upon “the kindness of strangers” – by which he means overseas buyers of Gilts and sterling-denominated bonds and those banks prepared to lend to us.
“If sterling looks set to drop much lower, overseas lenders or bond-buyers may take fright and either stop buying or at least demand higher interest rates (or Gilt yields) to compensate them for the higher risks associated with sterling assets.
“Higher Gilts yields could in turn thwart what the Bank of England is trying to do with QE, so it may be that a pound in the low $1.20s against the dollar will suit Mr Carney and his colleagues perfectly well.”
Potent cocktail of rising inflation and low interest rates to hit pensioners - AJ Bell senior analyst Tom Selby:
“Today’s inflation report confirms that the Bank of England is prepared to tolerate a period of inflation above its 2% target, which supports the prediction from NIESR that inflation could hit 4% next year. For many pensioners, inflation is an unseen leech that steadily drains the value of their retirement savings.
“Rising inflation should act as a wake-up call to anyone who has used the pension freedoms to cash in their pension and stuck the money in a low or zero-interest paying bank account. With interest rates unlikely to increase any time soon, such an investment strategy will guarantee their spending power will be eroded as inflation rises
“For people approaching retirement, the combination of rising inflation and low interest rates creates a difficult decision between an annuity or income drawdown. An annuity provides a guaranteed income but to inflation proof that you have to accept around half the initial level of income. Locking into an annuity without inflation protection will result in the value of income quickly be eaten away if prices do tick upwards.
“In drawdown, while the value of investments can go down as well as up, a well-structured drawdown portfolio at least gives you the chance to match or even beat inflation, rather than sitting by and watching your retirement income shrink in value.”