Quick view: Bank of England’s new hawkish tilt

21/06/2018

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The Bank of England (BoE) kept the Bank Rate steady at 0.5% at today’s Monetary Policy Committee (MPC) meeting but surprised the markets by adopting a more hawkish stance. Bethany Payne, Portfolio Manager, Global Bonds, explains what changed and the implications of the decision. 


While the BoE chose to keep rates on hold at 0.5% today, there was a more hawkish tilt as three MPC members were looking for a hike compared with two at the last meeting. Andrew Haldane joined the group of hawkish dissenters leading us to believe that there should continue to be a 50/50 chance of an interest rate hike at the August meeting.

The MPC view that moderately tighter policy would be needed but this would continue to be data dependent. While we have had some signs of wage pressures and improvement in retail sales, in our opinion we would need to see stronger signs of an improvement in data for the MPC to vote in favour of a hike in August.

In addition to the vote split, another point that caught our attention was the BoE’s intention to start balance sheet reduction when rates are at 1.50% rather than 2.0% in its previous guidance. While this switch to unwinding quantitative easing (QE) earlier than previously suggested is hawkish, we had already shifted our expectations lower as the lower bound for interest rates had been effectively moved to 0% from 0.5% (following the Brexit referendum), suggesting a 1.50% rather than 2% threshold to balance sheet reduction would be more consistent.

Tonight Governor Carney will be delivering his Mansion House speech; this is the first time in three years that we have the speech as previous speeches in 2017 and 2016 were cancelled. Typically, these speeches can be significant and the market will be looking for any continuation of the hawkish rhetoric.
 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson Horizon Total Return Bond Fund

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Janus Henderson Index-Linked Bond Fund

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  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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Janus Henderson Institutional Long Dated Gilt Fund

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  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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Janus Henderson Institutional UK Gilt Fund

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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