Economics

032 | UK monetary policy

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  • Tutor:
    • Chris Iggo, CIO Fixed Income, AXA Investment Managers

    Learning outcomes:

    1. The UK monetary policy framework and its objectives
    2. The unconventional policy implemented in the wake of the financial crisis and its consequences
    3. Why the policy will be reversed and its implications for investors

    Channel

    Economics
    Learning outcomes: 1. The UK monetary policy framework and its objectives 2. The unconventional policy implemented in the wake of the financial crisis and its consequences 3. Why the policy will be reversed and its implications for investors Tutor: Chris Iggo, CIO Fixed Income, AXA Investment Managers PRESENTER: In order to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. Hello and welcome to Akademia. In this programme, we’re looking at UK monetary policy and its impact on investment markets. I’m joined by the CIO for Fixed Income at AXA Investment Managers, Chris Iggo. Chris, thanks for joining us, could you give us a little bit of background on that? What are the key issues that we’re going to be honing in on? CHRIS IGGO: Well I think it’s important when we’re thinking about monetary policy to understand the framework in which the Bank of England operates, and it’s a well-defined legal framework with specific targets. Secondly, putting it into some kind of current context, I think it’s important to understand what the Bank of England’s been doing in recent years and particularly focussing on quantitative easing. And then lastly what’s the future hold? We are going to see interest rate increases over the next couple of years, how and why will that happen? PRESENTER: Well I guess setting the backdrop UK interest rates are incredibly low at the moment. We can see that on the charts here, why has that happened? CHRIS IGGO: Well I think we’ve lived through an extraordinary period in the last five or six years. We had the great financial crisis beginning in 2008 with the collapse of Lehman Brothers and all the associated problems in the financial sector. That spilled over into the real economy and we had a deep recession. You can see from the chart, real GDP growth went negative, and it turns out that this was one of the severest recessions we’ve seen in living memory in terms of the impact on the economy. It wasn’t just a UK phenomena as we know; this happened in the United States and in Europe and in other parts of the world. So central banks around the world responded very aggressively to that; the key fear was that we’d enter some kind of deflationary downward spiral in the major economies. So interest rates were cut to as low as they could possibly be, we saw that with the Fed in the US and we saw it with the Bank of England, so base rates have been at 0.5% now for a number of years. PRESENTER: And I suppose the big question, is the economy strong enough to stand on its own two feet now when it comes to interest rate? CHRIS IGGO: Well we can talk about that, I think it is. I think we’ve seen at least a year-and-a-half if not two years now of quite strong economic recovery in the UK, which is a result of low interest rates, but also some of the other measures that the Bank of England has been able to take, such as quantitative easing. So the economy is growing now. In Q1, we saw GDP expand by over 3%. We’re seeing strong growth in employment; we’re seeing strong growth in the manufacturing sector. My own bet is that interest rates will probably be increased at some point late this year. PRESENTER: Okay, well let’s move on from there to the Monetary Policy Committee itself. We always hear the phrase in the news, but what exactly is it, what does it do? CHRIS IGGO: Well it’s a nine member committee comprised of permanent Bank of England officials and also external members. This framework has been in place since 1997 when the incoming Labour Government passed the Bank of England Act. It created a much more independent central bank. So independent in that it was the MPC that had the authority to make interest rate changes, whereas before that the Chancellor of the Exchequer had been able to make interest rate changes. So it was a significant step forward in terms of central banking. So the committee meets on a monthly basis for two-and-a-half days. They assess the economy, they look at all the relevant information, and they see how the economy’s doing relative to the targets that the Government has set the MPC, and the most important target is the inflation target. The Bank of England is supposed to generate an inflation rate over the sort of two year moving period which is close to 2% and that inflation rate is measured by the consumer price inflation rate. There’s a margin of tolerance, so inflation can be within 1% either side of that 2% target, but if it’s outside of that range, i.e. if it’s below 1% or above 3%, then the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer explaining why inflation is not at target and what the Bank of England’s going to do about it. PRESENTER: How independent is it? I mean who appoints members to this policy? CHRIS IGGO: Well it’s a combination of the Bank of England and the Treasury Select Committee that makes these appointments. We’ve seen over the last 14 years quite a lot of turnover amongst the external members of the committee. So on average external members would be on the committee for around two years, and I think that turnover and the kind of broad range of external members we’ve had on the MPC means that it is quite independent in terms of its thinking, and so far operationally it’s been very independent. So there’s been no sense of any political interference in the decision making even during the heights of the financial crisis. PRESENTER: But we’ve got an election coming up in the UK, isn’t there a danger it sort of self-censors perhaps, steers away from decisions it should make thinking that’s really for the Government to make up its mind after an election? CHRIS IGGO: Well the Bank has to take into account government economy policy as well, and in the last few years what we’ve seen in response to the financial crisis is the Government spend a lot of taxpayers’ money on rescuing the banks in 2008, 2009, and the Government’s own finances have deteriorated over that period because unemployment’s been higher and they’ve had to spend more on welfare benefits. So the Bank of England assessing its own monetary policy decisions takes into account what the Government’s done. I don’t think it really takes that much into account the political cycle. So we are facing an election next May. Ideally, the Bank would like to avoid making an interest rate decision close to the election, but I don’t think it’s something that would stop them raising interest rates next May if they thought that that was necessary. PRESENTER: And we’ve talked a lot about selling interest rate policy, but what are some of the powers that it’s got? CHRIS IGGO: Well the Bank of England now is responsible for financial stability as well. So we’ve got the Financial Stability Committee, which is charged with looking at the entire financial system and managing what we call macro prudential policy. So this is thinking about limits on lending or setting capital ratios for the nation’s banks. So really trying to make sure that the financial system is stable. PRESENTER: And you mentioned earlier it’s targeting a certain set level of inflation, why is that so important? Why is that the be all and end all of what’s good or bad for the economy? CHRIS IGGO: It’s well recognised by economists that having a stable inflation rate is good for economic wellbeing. If you have too low inflation, deflation for example as we’ve seen in Japan in recent years, that tends to make people hold back on their spending, because they think prices are going to be lower in the future so they don’t spend today and that can lead to a kind of downward spiral of economic growth. If inflation is too high it erodes the real value of people’s wealth, because, you know, £100 saved today is going to be worth less in real terms if inflation is 10% over the next year, it’ll only be worth £90 in real terms. So keeping inflation low is good for savers and it’s good for all economic agents, because they’re in a more certain environment in which to make decisions. PRESENTER: A quick question before we move on, as somebody that works in the investment markets is the fact that the interest rate policy’s in the hands of the MPC better than having it in the hands of a Chancellor? CHRIS IGGO: Absolutely. I think when it was in the hands of a politician it was subject to political motivation rather than a very robust economic framework in which the MPC operates today. PRESENTER: Let’s move on to that inflation target. This chart coming up here suggests it hasn’t been that good at meeting its target. What’s this telling us? CHRIS IGGO: The chart here is plotting what actually happened to the consumer price index against what should have happened if they met exactly the 2% target. It’s a kind of mixed history since the Bank was made independent. In the first few years actually the Bank did a very good job in achieving an actual inflation rate which was very close to the target. Back then in the first few years of independence they were targeting the retail price index excluding mortgage interest costs, so it was a slightly different inflation measure. Since 2005, they have been targeting the consumer price index, which makes it more consistent with our European partners. Since 2007 though inflation has been higher than targeted, and I think this is to the nub of the problem for central banks, they can’t control inflation exactly. They can only create a framework in which stable inflation is intended to be arrived at. In the UK, we are quite an open economy, so if global oil prices go up that affects our inflation rate. The Bank of England can’t do anything about that. It can’t affect the supply and demand for oil, similarly with food prices, or if there’s some kind of shock that causes prices to go down. So the Bank can affect mostly domestically driven inflation, which has been quite low, but in periods since 2007 global inflation has been quite high. And remember during the financial crisis the value of sterling fell quite sharply, so everything that we imported cost more and that affected inflation as well. Now the Bank of England could have raised interest rates to push the pound higher, but that would have been inconsistent with what was happening in the domestic economy. At the moment, we’re slightly below the target inflation rate, it’s not got the numbers for 2014 on the chart, but in the last few months inflation has been below the 2% target level. So that’s the first time for a number of years that we’re actually doing better than the inflation target. PRESENTER: So is the role of Bank of England increasingly to hunt in a pack with other central banks? CHRIS IGGO: I think it’s easier for the Bank of England to meet its own targets if other central banks have similar targets, so they’re all focussed on keeping the global inflation rate quite stable. If we look at the European Central Bank, their target is to keep the inflation rate close to 2%. The Fed also has a 2% target for its preferred measure of inflation which is slightly different to the consumer price index. So if they’re all operating in the same model then it does make the job of individual central banks a lot easier. PRESENTER: Well they’re trying to get a certain level of inflation, but surely there must be times where actually they think we’ve got more important jobs than inflation, how much wiggle room have they got in terms of their mandate? CHRIS IGGO: There’s quite a bit of wiggle room, because first of all there’s a range of outcomes between 1 and 3% which is tolerable. Secondly, they can go outside of the range and they have to write a letter to say, you know, what they’re going to do about it, if inflation is too high or inflation is too low. But again let me refer back to the financial crisis inflation was above the target range and there was a number of letters written between the Bank of England and 11 Downing Street, but at the time the economy was in recession. So common sense suggested keep interest rates very low because you need to stimulate the economy, and the inflation target was a secondary target at that point. PRESENTER: All right, well moving on then to the impact of interest rate measures, as you said they’re very low at the moment, but if they go up can you run us through what that’s likely to do the major asset classes? CHRIS IGGO: Yes, of course the most obvious asset class that’s impacted by interest rates is bonds and particularly government bonds because they’re risk free. They’re priced in terms of interest rate expectations. So if interest rates start to go up it tends to push up the yield on bonds and that causes the price of bonds to fall. We see that mostly in the short-term part of the government bond market, so bonds with a maturity out to three to five years mostly. The rest of the yield curve can be affected by those short-term interest rate movements, but tends to be more affected by long-term considerations of inflation and economic growth. Corporate bonds are slightly different, because they also have a credit risk element. So these are bonds issued by companies who pay slightly more in interest compared to the government to get investors to buy the bonds because there is credit risk involved. Again they would be impacted to some extent by changes in interest rates, but they’re also impacted by changes in that credit risk premium, which in itself can be affected by interest rate levels, because if interest rates were to rise very quickly investors will take the view that that’s actually going to be negative for the economy going forward and it may lead to a deterioration in the credit environment. So credit spreads, corporate bond risk premiums can rise when interest rates go up as well. PRESENTER: So if rates are going up because effectively the economy’s doing really well that’s not necessarily bad for corporate bonds it’s if rates go up so much that they kill off economic growth that’s the problem. CHRIS IGGO: That’s right, yes. So the asset class to avoid in this discussion so far is government bonds, because they’re the one most affected by interest rate increases. With currencies, it’s not always that clear, but the textbook approach is that if interest rates go up it makes the currency more attractive to short-term investors, because they can place money in sterling for example and get a higher return than in dollars or euros and therefore the value of the pound would rise, and conversely when central banks cut interest rates it tends to lead to a depreciation of the currency. In many countries, it actually works the other way round that interest rate policy is really governed by what happens to the exchange rate. If we think about Australia and New Zealand for example movements in their exchange rates tend to drive interest rate policy. So if the Australian dollar is too strong the Reserve Bank of Australia tends to cut interest rates. So it can work both way rounds. For equities, I think it’s one factor that affects equity markets. The most important driver of equity markets is the strength of the economy and corporate earnings, but of course if interest rates are going up aggressively as in the case we saw with corporate bonds that can lead to a deterioration in expectations about corporate earnings and being negative for the equity market. With commodities, I think it’s difficult to say, commodities tend to move dependent on supply and demand conditions in their own markets, but globally if monetary policy’s been tightened it slows down economic growth and that slows down the demand for commodities. PRESENTER: And also a lot of commodities are priced in dollars, so does that bring us back to the foreign exchange point? CHRIS IGGO: Absolutely, so there is a kind of secondary impact. PRESENTER: And we’re talking about moves of interest rates, but I suppose the big question is when do interest rates go up and by how much? What sort of quantum interest rate moves do we have before it starts to have really negative impacts on some of these asset classes? CHRIS IGGO: It depends where you are, because from an asset allocation point of view, you know, you’re either benchmarking against cash where you get paid interest on your cash holdings or against very safe government bonds which the yield is very closely related to interest rates. So your view on other asset classes has to be based on the question does the return beat what I can get on cash or on very safe government bond yields. So as interest rates go up that becomes more challenging for other asset classes and particularly at this time where corporate bond yields for example are very low. So there isn’t much of an extra cushion compared to very safe government bonds or cash. So I think in the world we’re at today where most asset prices have been elevated because of low rates and QE, it’s not going to take much of an increase in interest rates to have a negative impact on these other asset classes. We saw in May 2013 when the Fed started to talk about tapering it led to declines in bond prices and equity prices, and I think once we get to that point where interest rates start to go up again maybe late this year or early next year there will be a negative response from most financial markets. PRESENTER: All right, we’ll come to that in a bit more detail later, but as you said at the start one of the key things is to establish I guess the environment of which the Bank of England is operating at the moment. So going back to 2007 talk us through what’s happened, what’s been abnormal about this period? CHRIS IGGO: Well it was a recession caused by the biggest financial crisis that we’ve seen since, you know, the 1920s where banks were almost going bust or some did go bust and balance sheets became extremely weak, so it needed extraordinary policy responses. The first thing that happened was that interest rates were cut to these very very low levels. Now you can only cut interest rates to zero, it’s difficult to have negative interest rates, but that was what happened first. Rates were cut, fiscal policy was used to support the financial system, and what asset classes benefitted from that mostly were government bonds, because they were safe havens, you know, governments don’t go bust on the whole, so money went into government bonds. It was helped by the fact that interest rates were cut, bond prices went up very aggressively. So that was the initial response to the crisis, but then it became apparent that there was a broader economic impact from the financial crisis and that with interest rates already at zero what could central banks actually do? So they came up with this policy of quantitative easing, which academically was a way of circumventing what economists call the zero rate band. So the fact that central banks couldn’t cut rates below zero, they had to do something else. So they thought the equivalent of that was by expanding their balance sheets and buying government bonds in the open market. So the intention there was to drive down yields across the whole yield curve, so particularly bringing medium and long-term bond yields down, which meant that the cost of capital to the economy was reduced and the intention was that ultimately that would lead to an increase in investment and economic growth would resume. It took quite a long time and it saw a massive increase in balance sheets of central banks, you know, a trillion dollars in the United States, £375bn in the UK, Japan is still expanding its central bank balance sheet in order to make sure long-term interest rates stay low. But it’s worked. We are seeing economic recovery now in many parts of the world. So the next phase is unwinding these extraordinary measures and going back to some kind of normal monetary policy, and that’s the challenge for central banks over the next couple of years. PRESENTER: And when you were saying that QE’s worked, but in a sense has it? I mean there’s a lot of debate in the press about whether it was the right thing to do, you know, the exact consequences that people wanted have come out of it. There’s quite a school of thought that QE’s been more of a hindrance than a help. CHRIS IGGO: Well we don’t know the counterfactual. We don’t know what would’ve happened if the banks hadn’t done QE. What we do know is that bond yields, interest rates came down to levels that they probably wouldn’t have done without QE, and this meant that investors, I work for a big asset manager, we were faced with investing in very very low yielding government bonds or investing in the credit market, in corporate bonds which you got a higher yield. Well it was a no-brainer, so you invest in corporate bonds. That means there’s money available for the corporate sector to use to improve their balance sheets, also to invest and start to employ people, so I think it did work. It also led to asset price inflation. So equity markets have done very well since central banks started QE, bond markets have done very well, that creates a wealth effect, and that can in turn be positive for economic growth. PRESENTER: And if there’s this great pool of gilts that’s owned, I guess what happens to it? CHRIS IGGO: I think that’s open to debate still that I don’t think we’re getting clear signals from central banks about what they will do with the massive holdings of government bonds that they have on their balance sheets. One thing they’re not going to do is sell them quickly, because the phase of normalisation will be characterised first of all by increases in interest rates, that’s the easiest tool to use. Now there are two ways that QE might be unwound. One is that they could just hold the bonds and let them mature naturally, which will take a long time, because some of the bonds that were bought were 20, 30 year maturities, so that means central bank balance sheets will only decline over a long period. Another thing that they can do is stop reinvesting the coupons that they get on the holdings of bonds that they have on their balance sheet and that will lead to some gradual decline in the balance sheet as well. The third thing they could do is go into the market and sell bonds. But I don’t think the gilt market would be very happy about the Bank of England suddenly starting a policy of selling gilts. That would lead to yields rising very very quickly and would backfire. PRESENTER: And how much are they going to be influenced by the fact that gilts are what all the insurance companies hold for backing our annuities and all sorts of long-term liabilities? CHRIS IGGO: Well that’s a consideration. Throughout the crisis and throughout the period of QE there was a lot of gilt supply, because the Government needed to borrow a lot of money because of the financial crisis. So there hasn’t been a shortage of gilts. But at some point it’s feasible that if government finances improve and they’re issuing less gilts the Bank may then be encouraged to let some of its portfolio go back into the market, because there is a natural demand as you say for gilts. PRESENTER: And one of the points I want to pick up here said the Bank argues policies work because growth has returned, we’ve talked about that, but there hasn’t been an overshoot of inflation. A lot of people would say you can never get the inflation genie back in the bottle. Are you concerned about that that these low rates for such a long period, this great monetary experiment, it will end in inflation? CHRIS IGGO: I think it’s a risk. If you’re expanding the balance sheet what you’re expanding is money supply, and economic theory tells us that if you expand money supply quicker than the economy can grow then that leads to inflation. We haven’t seen inflation pick up so far. I think the reason for that is we’ve been going through a period of very aggressive deleveraging in the banking system, in the government sector, and that’s held back demand. So most economies are still operating with spare capacity, which isn’t usually a backdrop to inflation rising, but in the future I think inflation could pick up and that’s one of the concerns. So I think central banks need to think about raising interest rates in order to make sure that inflation doesn’t rise too quickly going forward. PRESENTER: I want to bring up this is showing what the QE has meant in terms of the Bank of England loaning a huge number of gilts, but this £375bn you mentioned earlier, can you put that in some sort of context? CHRIS IGGO: It’s about a third of the outstanding gilt market. So that’s a significant increase in ownership of the gilt market by the Central Bank compared to before 2009. So it does have some implications for liquidity in the gilt market, and it’s also meant in a way that traditional owners of gilts have been squeezed out. So they have had to move into riskier assets into corporate bonds, into high yield bonds, even into equities or property. That’s been fine because the markets have been buoyant, but there could come a point when investors think they’ve got too much risk in their own portfolios and would actually quite like to have some gilts again. So there is that liquidity concern I think. Going forward, the percentage owned by the Bank of England will naturally decline, but I think I’m right in saying that we’re now at the lowest percentage of the gilt market owned by domestic venture funds and insurance companies than we’ve been at for many many years. PRESENTER: And what sort of impact does this have on the UK’s credit rating? CHRIS IGGO: Well so far it’s led to some concerns by the rating agencies. I think that was really more about the Government’s finances, the weakness of the economy and the banking system, but we’ve moved on now. I think over the last year everything’s got better. So I’m not overly concerned about the credit rating. I don’t think the fact that the Bank of England owns these gilts is a major concern for the credit rating agencies. PRESENTER: Okay and let’s move on to the next phase of monetary policy. You said we talked about the extraordinary circumstances we got into and I guess the key thing is how do we get out of them, can you just talk us through what some of the key concerns are there? CHRIS IGGO: Yes, so I think we can split up the monetary policy history over the last few years into these phases. So we had quantitative easing which brought down long-term interest rates, flattened the yield curve. Then we’ve had forward guidance, which I’m not sure has been 100% successful, but that’s when Mark Carney as Governor of the Bank of England publicly says we’re going to keep interest rates low for a very long period of time, believe me that’s what’s going to happen. Of course the market doesn’t 100% believe him because the economy’s growing and there are inflation risks. So I think we are now focussed on the normalisation period and that is when short-term interest rates will be increased again. An important consideration here is the communication policy of the Bank of England, how do they keep expectations in the market in check? And I think in order to do that they need some clear economic targets. So they have talked about the unemployment rate perhaps falling below 6%, inflation rising back to the target. These are the kind of economic variables we need to see before they start to raise interest rates. It’s not totally unambiguous, but the market has some idea of where the economy needs to be before interest rates start to go up. My own view is that we’re very close to that point and therefore we’ll see some increases in interest rates possibly before the end of this year. The second point I think more importantly is where do they eventually go to? Because, you know, I was around in 1992 when base rates hit 15%, we’re not going back to those kind of levels, thankfully and we probably will end up with what central bankers now call a terminal rate which is much lower than in previous monetary cycles. So base rates may go back to 4, possibly 5% in this kind of next five years, but it will be very very gradually. PRESENTER: And when base rates move are they likely to be in sort of 25 basis points increments or 1%? Again if you’re moving them up what do you do? CHRIS IGGO: I think the mantra at the moment is go gradually and start early, so that’s why I think, you know, November this year is possibly when they do start, but they will be in very small increments. So the disruptive impact of that on the mortgage market I think will be quite limited. PRESENTER: If you’re the Monetary Policy Committee making this decision you must be under huge pressure to get it right. What are the pros and cons of raising rates too early or raising them too late? CHRIS IGGO: Yes, it’s a big decision, because we’ve had six or seven years now of rates being close to zero, not just here, but in many parts of the world. The day they decide to raise interest rates is basically, you know, closing the chapter on the great financial crisis and saying we’re back to normality, that’s a big call and it is fraught with potentially making a mistake. If they raise rates too quickly where we are likely to see the stresses show up is in the housing market, because mortgage rates could go up. That could slow down mortgage lending, it could lead to some house price corrections, and that would have implications for the broader economy in time. If they raise interest rates too late it will be inflation that will get them and inflation as you said earlier it’s hard to get that genie back in the bottle. So if we start to see the consumer price inflation rate going to 2%, 2½% later this year or in 2015 and the Bank hasn’t raised interest rates I think ultimately rates will have to rise much more quickly. PRESENTER: And behind all of this back in the financial crisis everyone talked about moral hazard, people who have taken too many risks being let off the hook, not heard that phrase in the last few years, behind all of this is the economy and the financial system learned or are we all going to be back in this mess fairly soon? CHRIS IGGO: It’s a good question. I think we haven’t dealt with all the problems of the past anyway. So if we look at the household sector in the UK outstanding debt is still very high. So the household sector is quite leveraged still and it’s got away with that for the last few years because of interest rates being so low. But once rates start to go up there could be some problems with consumer debt or mortgage debt. In the wholesale financial markets, we are starting to see some of the structured credit products coming back into the bond market and it is slightly reminiscent of 2006/2007 where investors are looking for ways to boost the yield on their portfolios by taking on less transparent financial products and it makes it easier to do that when interest rates are so low. So I think there are some risks of history repeating itself and when rates go up, you know, some of those problems may emerge. PRESENTER: Well moving on the outlook going forward, just, as you said there’s lots of debate around this, but talk us through your views on what’s going to happen next and why. CHRIS IGGO: Well we’ve seen data recently during the economies growing very strongly, about 3½% GDP growth. Unemployment rate is now getting down towards 6%, the housing market is booming. The only piece that isn’t quite fitting in the jigsaw at the moment is the inflation numbers which have been below target. But I think the UK economy is close to full capacity with very very low interest rates. So the arguments for starting increasing rates I think are quite strong. What holds the Monetary Policy Committee back I think still is not fully understanding the legacy of the financial crisis and where there may still be some fragilities in the system, and the fact that inflation is low so there are some members of the MPC that think about deflation as being a threat. But I think the tide is turning a little bit and we’ll start to see increases coming possibly as early as November. Then as we said it will be modest gradual increases throughout 2015, maybe into 2016, and we could see some pauses. They may get to 1% rates and pause and see how the economy responds, and then again at 1½% and so on, but over the next two years I think we’ll see this gradual increase in interest rates. PRESENTER: And when you say you see the point it says QE’s unlikely to be reversed any time soon, do you mean by that that there’s an ongoing programme continuing to buy government bonds or they just won’t buy any more of them? CHRIS IGGO: No, they haven’t been buying for a while now, so the chart we showed which had the level of gilts held by the Bank of England has been quite stable. PRESENTER: As a pool… CHRIS IGGO: There’s a pool of gilts that they own, they’re not going to be buying any more, but equally I don’t think they’re going to be selling them into the market. PRESENTER: Okay and then I guess what are the implications of that? Because that’s all the theory, but what does it mean for investments and their asset classes? CHRIS IGGO: Well I think when we look across the whole different asset classes the one asset class that’s performed extremely well in the last three years has been fixed income. We’ve seen returns to government bond holders, credit holders, high yield, emerging market debt being much higher than the historical averages, so 10% return to high yield bonds in Europe last year, emerging markets is already touching 10% this year. These are levels of return that you wouldn’t normally associate with fixed income. So I think as interest rates start to go up the level of return to bondholders will come down and it may actually fall below the long-term average. So certainly in government bonds we could be faced with a year or so of close to zero returns. For corporate bonds it’s going to be similar, but you’ll get a little bit of extra because of the credit risk. The same with high yield and the parts of the high yield market which should continue to do very well are the short-term bonds in the high yield fixed income market. For the equity markets I think it’s a bit more difficult to say. If it’s a gradual tightening of monetary policy and the backdrop is strong economic growth and still fairly low inflation that means the equity market could continue to rise and P/Es could continue to expand. What we haven’t seen a lot of in this economic recovery is a pickup in world trade or a pickup in real capital investment spending. Companies have a lot of cash. If they start to put that to work to grow their businesses through investment that will create more employment, it would create more growth, and I think that’s actually a very bullish backdrop to the equity market. For sterling I think we’re already starting to see sterling strengthen against the dollar and against the euro, because the anticipation is that the Bank of England will raise interest rates more quickly than the Fed and certainly than the European Central Bank. On the domestic side, we need to look at the housing market, because I think mortgage rates have started to drift higher. They will go up as the Bank of England raises interest rates. The housing market is very buoyant at the moment. That will probably come off the boil as mortgage rates rise. PRESENTER: A final thought how long until we’re in a normal environment again? CHRIS IGGO: I think we’re close to a normal environment in terms of where the economy is. I think it’d probably be two years before we get to a normal monetary environment. That will mean I think interest rates settling at a level which is much lower than they have done in the past. PRESENTER: Have to leave it there, Chris Iggo thank you very much. 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