City Watch: Charles Sylvester sees a potential precedent in New Zealand

Charles Sylvester of Charles Stanley & Co, Ipswich

Charles Sylvester of Charles Stanley & Co, Ipswich - Credit: Archant

In early July, the equity market pulled back as investors contemplated a turn in the UK interest rate cycle.

In addition, there were the events in Gaza and Ukraine, and problems in the eurozone as a fall in Germany’s monthly industrial production figures increased fears that the economic recovery might start to peter out. There was also a 4% fall in the Portugese stockmarket, when Banco Espirito Santo saw its shares suspended.

However, unlike the eurozone, the UK economy is growing strongly with employment increasing by a record 345,000 in the last quarter, the fastest rate of growth for 40 years.

For the moment the UK base rate continues to be held at 0.5%, set during the darkest days of the financial crisis. Mark Carney, the governor of the Bank of England, recently warned the markets that the first increase in rates “could happen sooner than markets expect” and also suggested that 2.5% could be the new “norm” as opposed to the old long term average of around 5%.

One of the major uncertainties is, of course, how the markets are going to react when the tightening cycle begins; maybe events in New Zealand are going to be a precedent. The Reserve Bank of New Zealand was the first central bank from a developed economy to start normalising rates. It is a relatively small economy with some familiar characteristics such as strong growth (3% plus estimated for 2015), house price inflation, a strong exchange rate and little wage inflation.

The bank has now raised rates three times since March, to 3.25 % the highest in five years, and the NGZ 50 equity index (their FTSE equivalent) is up 8% this year to date.

: : Charles Sylvester is an investment manager with Charles Stanley & Co in Ipswich.