Hello from the latest team to join the Ravenscroft family - we are all delighted to be here. Ravenscroft Cash Management came into being on the 2nd November following the acquisition of the Guernsey based segregated cash management team previously owned by Royal London. Whilst the company name has changed little else has and you can read more about us at the bottom of our first contribution to the Ravenscroft Weekly Update.
Last week was a reasonably busy one data wise in the UK, with the Budget plus the quarterly Bank of England Inflation Report and MPC policy decision, and so we will concentrate on this side of the Atlantic.
In the Budget, the main news was the end of austerity. Well sort of; and as long as there is a Brexit deal. The OBR – Office for Budget Responsibility (A great Dickensian name although presumably the alternative would be an Office for Budget Irresponsibility!) provided most of the reason for the Chancellor’s largesse. The OBR revised up its forecast for tax receipts by the largest amount since it was established in 2010. This enabled the Chancellor to cover the already announced £20.5. billion of extra funding for the NHS plus another £10 billion of additional spending and earned him the moniker ‘Fortunate Phil’ in the Times.
Turning to the Bank of England; as markets expected, the MPC voted unanimously to leave..(pregnant pause) UK interest rates unchanged. However, the accompanying forecasts were slightly more hawkish. The inflation forecast was based on one interest rate rise a year over the next three years but inflation is still expected to be above the 2.00% target for virtually all of the forecast period. At the same time the report noted that the output gap was closing as economic ‘slack’ was being eroded.
So with the budget on the generous side, and several key indicators for the Bank of England starting to inch higher, this should mean that markets are preparing for another interest rate rise in the UK. Whilst it is true that one year yields have firmed slightly over the last week, everything is still tempered by the risks outlined by the Bank of England.
They highlighted two main risks; that global economic growth maybe becoming more uneven is important but Brexit is of course the key concern. The Bank of England’s forecasts are predicated on a smooth transition with a deal being agreed, although this is more to do with not appearing to support a contrary view and so being accused of political bias. The Bank reported that the impact of Brexit ‘cannot be determined in advance’ but that ‘under all circumstances, the MPC, will respond to any material change in the outlook’.
This caveat is very similar to that of the Chancellor’s – the outlook is reasonable, as long as a deal with the EU is reached. If that doesn’t happen then it is likely that, at least in the short term, both fiscal and monetary policy will have to change. In what direction monetary policy may move is open to tremendous debate. Our crystal ball is not fine-tuned enough to give us those answers but our feeling is that the inclination of the Bank of England would be to cut interest rates to support the economy rather than raise interest rates to support the pound.
However, on a positive note for money market investors; should a Brexit deal be done then current evidence suggests we will see a slightly faster pace of UK interest rate rises over the next few years.
And finally, a bit more about us…. The Guernsey-based team of Ravenscroft Cash Management manages approximately £2bn of client funds in segregated portfolios holding money market instruments. The two investment managers responsible for managing client assets, Pierre Paul and Jon Pope, each have over 20 years experience investing active cash portfolios. Our focus is on potential changes in official interest rates and how economic data and central bank announcements impact upon the money markets. We manage money in USD and GBP hence this is where we concentrate. We do also hold Euro client assets, although with negative interest rates in the Eurozone appetite is currently reduced for a service which will guarantee a client receives back less than they invested; most investment managers can at least hold out the chance of a positive return!