“It was all about the inflation report, whereas the previous Super Thursday in August was all about the policy decision. In August the Bank reacted to the EU Referendum result and cut the Base Rate, which was widely expected, but also restarted Quantitative Easing, which was largely a surprise. For pension schemes the QE news is more significant in many ways as it focusses more towards longer dated assets and joins a number of other central banks globally hoovering up an ever greater percentage of safe assets. This global policy fundamentally pushes up liabilities for pension schemes; an issue trustees and sponsors are all too aware of already.
“The announcement of changes to inflation and UK growth forecasts will have the biggest impact. The Bank has altered its forecasts significantly over the past 3 months as growth has held up better than expected. This is generally a positive for assets and sponsor covenants alike, and led the Bank to increase its near term GDP forecasts; albeit they reduced their longer term ones.
“Inflation is reacting to the substantial fall in Sterling that has occurred over the past 12 months. This has led some to ask if the Bank will have to raise rates to bring inflation back under control. Carney reiterated today that the Bank was willing to “look through” short term inflation effects, but that was a limit to how much inflation they could accept. Unsurprisingly he was quiet on just how much.
“As if Thursday wasn’t “super” enough we also today had the latest stage in the Brexit discussions with the High Court ruling that Parliament has sovereignty over the government in terms of triggering Article 50. Sterling rose on receipt of this news, highlighting the only limited role Carney has to play in shaping markets. Fiscal policy, via the Autumn Statement later this month, may well be another such example.
“These movements reaffirm the challenge pension schemes, and all savers alike, have been grappling with over the past 7 years. Negative real yields (interest rates lower than inflation) looks set to remain for many years to come.”
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